Since the Covid-19 pandemic erupted Pharma Funds have been in the limelight. It triggered a boost in their performance, which delivered an average return of a whopping 56%, over the last one year. But now the question that must be buzzing in the mind of every investor is, will pharma funds continue to deliver such high double-digit returns or will they fade off once the pandemic dies down? In this article, we cover various aspects of the Pharma & Healthcare industry which will help you to decide whether investing in Pharma funds is still meaningful or not.
While the pharma industry comprises of producers and distributors of pharmaceuticals, drugs and other medical products, the healthcare sector includes not only the pharma industry but also hospitals, medical devices, clinical trials, telemedicine, medical tourism, health insurance, medical equipment, etc. From amongst the top 500 companies listed on the stock exchange, in term of market capitalization, there are 44 which belong to the pharma industry and 7 are from the hospitals and health service industry.
India’s expenditure in the Pharma & Healthcare sector is very low as compared to other countries. The graph below shows the per capita expenditure on healthcare in various countries.
Accordingly, India’s per capita expenditure is only 7% of the world average, which is considerably low. There is a definite need for higher allocation of budget towards healthcare facilities, which will certainly elevate the growth of the healthcare sector.
Nevertheless, healthcare has become one of India’s largest sectors, both in terms of revenue and employment. The healthcare sector including the pharma industry has reached US $ 194 Billion (estimated) in 2020 and is expected to reach US $ 372 Billion in 2022. The graph below shows the trend in the growth of the healthcare sector’s market.
The macro-economic risk in the pharma sector is comparatively lower than other sectors. This is because irrespective of how macroeconomic variables - interest rate, GDP and inflation – move, the need for medication and healthcare services is unaffected. So, for pharma companies, the macro-economic risk is near zero. Along with this, a major chunk of the revenue of pharma companies comes from export. So, when the dollar appreciates it adds to the revenue of pharma companies.
Government initiatives and technological developments are bringing about disruption in Pharma & Healthcare, but not every company in the sector is going to benefit from it. It is important to undertake thorough research on which companies could reap these benefits before making any investment decision. By investing in mutual funds, you not only get the benefit of the research done by the fund manager and the supporting team but your investment gets automatically diversified across various pharma & healthcare companies.
Pharma Funds, as a whole, are still at a very nascent stage and there is a lot of scope for them to grow. The market capitalization of the entire pharma & healthcare industry is ~ Rs. 14 lac crores, whereas the total size of pharma funds is ~Rs. 14k crores, translating into ~ 1 % of the entire sector in terms of value (This excludes the holdings in pharma stocks in other categories). There are only 9 funds in the pharma space, out of which only 5 of them have an AUM above Rs. 1,000 crores. Out of these 9 funds, only 5 funds are more than 3 years old while the rest were launched within the last 3 years only. So, entering the pharma space at this point of time will definitely give investors the advantage of being an early entrant. The table below shows the performance of pharma funds.
As sectoral funds are exposed to a single sector, this makes them more risky than diversified equity mutual funds. A diversified portfolio is what minimizes the risk profile of a mutual fund. Thus, the risk associated with sector funds is high. The table below shows the calendar year returns of Nippon India Pharma Fund, which is one of the oldest funds in this category.
From the graph above it is clear that the pharma category had a slack period of four long years before it started performing in 2020. So, the risk involved in a single sector can be different from that of the entire market.
Rising incomes and growing awareness about healthcare are expected to result in early diagnosis of chronic diseases and better management of ailments. This may create a pull factor for medicines and delivery of healthcare. Although India is popularly termed as the world’s youngest nation, it also has the 4th largest population of people above 50 years of age. It’s been observed that the healthcare spent by the 50+ population is 5-10 times more than the average per capita spending on medicines and healthcare services. Indian pharma companies derive nearly 50% of their revenues, on an average, serving the Indian population.
In September 2020, 43 pharma & healthcare companies were in the top 500 companies (in terms of market capitalization), currently, there are 51 companies in the list. This shows that the size of leading pharma companies is increasing at a faster pace. Technological disruptions and innovations in the sector are likely to further accelerate the pace of the sector’s growth in India as well as in the global markets.
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Disclaimer: The blog is for information purposes only and anything mentioned herein shouldn’t be construed as a fundamental reason to buy/hold/sell any stock. Furthermore, the information provided in the blog and observations made therefrom shouldn’t be treated as the extension of recommendations made on the other properties of Ventura Securities. We strongly suggest you to consult your financial advisor before taking any decision pertaining to your finances. Asset allocation becomes extremely relevant.
We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.
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