Domestic mutual funds (MFs) have taken a liking to pharmaceutical stocks, following a steep fall in the latter's prices.
While they expect the pharma sector to undergo headwinds, they are taking a contrary view on select stocks with an investment horizon of two to three years. Sun Pharmaceutical, Apollo Hospital Enterprise, Dr. Reddy's Laboratories, Aurobindo Pharma and Fortis Healthcare were among the most-bought stocks in the month of May by fund managers. Last month, Divi's Laboratories, along with Aurobindo and Fortis Healthcare, were the top picks.
S Naren, chief investment officer (CIO) at ICICI Prudential MF, says, "India's pharmaceutical companies have been under intense scrutiny from the US Food and Drug Administration (FDA) over the past few years. This has led to considerable price erosion. With the popularity of this sector at a multi-year low, the ownership of stocks in the sector saw a steep decline. We believe that, at the current juncture, the (share of the) sector is largely inexpensive. Rather, the valuation has corrected about 25 per cent if one looks at the price-to-earnings ratio. We see there will be a revival in
earnings and buying the space at the current phase might make it a good contrarian investment bet for 2-3 years."
The FDA observations, along with pricing pressure in that market and here, have hit the growth of Indian pharma companies. Once seen as defensive bets, market participants had started avoiding the sector, given its uncomfortable valuations and poor growth outlook.
However, fund managers believe that given the massive investments in the research & development (R&D) activities and expectations of product launches in the next two-three years, there might be a turnaround.
Ashish Ranawade, CIO of Union MF, says: "Indian pharma companies have the inherent capability to manufacture newer products at much cheaper rates globally. Amid pricing pressure in the US market and slower growth in the domestic market, the only factor that can negate the trend is fresh launches. Companies have invested a lot of money in R&D and there have been several new product filings. All these factors might play out well in the future and there could be a re-rating of the sector. Currently, we are equal weight on the sector and a two years' investment horizon holds
good."
The majority of pharma counters have bounced back significantly from recent lows. For instance, Aurobindo Pharma, a favorite of fund managers, has already gained nearly 50 per cent against its recent low. Stocks of Cipla, Sun Pharma and Dr. Reddy's have gained 10-20 per cent. This has helped the portfolios of MF schemes.
Amid this, there is also a word of caution. Taher Badshah, CIO at Invesco MF, said: "Though many of these stocks have bounced back recently from their lows, it's difficult to take a sector call. We will be very choosy and stock-specific, as every company has its own problem and one parameter should not be enough for taking a call on the entire sector. Even after steep corrections, I see the valuations of many of the counters continue to remain expensive."
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