Healthcare – A Sector Worth Investing Into?
“We believe that the last 3 years have taken out a lot of froth from the system in terms of both earnings expectations and valuations," said Vrijesh Kasera, Senior Research Analyst and Fund Manager, Mirae Asset Mutual Fund
It's no secret that investors in the Pharma Sector Mutual Fund schemes have had a raw deal in the past three years. Depending upon their choice of fund, they've likely earned a measly return ranging from -5% to +3% on an annualised basis. The sector shone bright in the 5-year period ending in 2014, mainly owing to a number of products going off-patent, and due to the slow pace of approvals from the USFDA that stymied competition. The tide turned post-2014 though - the implementation of GST, coupled with a slower and more stringent approval process from the USFDA, combinedly hit the sector hard.
If Asset Manager conviction is to be believed, the sector may be in the process of bottoming out now - and this has prompted not one but two AMC's to launched NFO's (New Fund Offerings) in this space: ICICI Prudential with its P.H.D (Pharma, Healthcare & Diagnostics) Fund, and Mirae Asset Global Investments with its Mirae Asset Healthcare Fund respectively. The former opens for subscription from 25th June, while the latter opened on the 11th of the month.
"We believe that the last 3 years has taken out a lot of froth from the system in terms of both earnings expectations and valuations. If we go by the recent commentary of global pharma companies, it indicates early signs of stabilization in the market, with players vacating the market which has become economically unviable", said Vrijesh Kasera, Senior Research Analyst and Fund Manager, Mirae Asset Mutual Fund in a recent interview with BW Businessworld. Kasera will manage Mirae Asset's fledgling Healthcare Sector Offering.
Fundamentally, factors such as rising lifestyle diseases, increases in medical tourism to India, and increasing government spending towards the sector as a whole, augur well for the space over the long run, making this theme a relatively solid structural story.
"There's been a huge learning curve for some these companies in terms of compliance on USFDA and we believe they are at fag-end of the problems as far as USFDA goes. We expect the pace of product approval to improve going forward", said Sachin Trivedi, Head of Research at UTI Mutual Fund.
"India business, which is the bigger contributor to the profit pool for many of these companies should also start to register growth; as this side of business has also faced difficulties in last few quarters' post demonetisation and implementation of GST", added Trivedi.
Notably, UTI AMC's Healthcare offering, at Rs. 385 Crores of AUM, is yet to gather steam where asset mobilization is concerned; while its counterparts Reliance Pharma Fund (1928 Crores) and SBI Healthcare Opportunities Fund - previously "SBI Pharma Fund" (914 Crores) have made deeper inroads in this space.
Interestingly, the Price to Earnings Ratio of the Nifty Pharma sector index is still hovering around 50X (the same as its highs of 2014) - while its Price to Book Value Ratio has fallen from 6.26 to 3.92 in the past four years. This may be indicative of a certain degree of undervaluation within the sector.
"Valuation of the sector is attractive with both top-down and bottom-up approach favouring the allocation towards the sector", said S Naren, ED & CIO, ICICI Prudential AMC.
Commenting on the rationale behind launching their NFO in this space at this time, Naren went on to say - "we believe the concerns surrounding the pharma sector have been priced in at current levels. Strong balance sheet, capable management and cash generation ability of the pharma space can do justice to the long-term value creation for our investors. This is why we have come up with this offering at this juncture"
In range bound markets such as these, a "dose" of Healthcare may be just what your portfolio needs. Consider making a judicious allocation of no more than 10% of your overall equity portfolio to it though - sectoral funds can be extremely volatile and unpredictable in the short term.