Sailesh Raj Bhan, Deputy CIO, Equity Investments, and Pharma Fund Manager at Nippon India Mutual Fund, explains how a long-term approach in Systematic Investment Plan (SIP) is a good way to invest in a pharma fund, given its favourable trends, during an interview with Himali Patel. Edited excerpts.
Recently, pharma funds have been offering good returns. What could be the reasons behind this rally?
The pharma sector in India is one of the most globally competitive sectors. Earnings revival in recent months was the main trigger for the sector’s outperformance, given the fact that valuations were relatively attractive. The sector’s long-term earnings visibility is also strong, given that it is secular and remains ‘unpenetrated’ in India. The COVID-19 crisis also brought out importance of the sector. This should lead to increased awareness and spending over the next few years.
Given the challenging market environment, is it the right time for MF investors to invest in equity sectoral pharma funds?
The pharma sector has many diversified revenue streams. It is among the most globally competitive sectors from India, exporting to more than 100 countries, in addition to a fast-expanding domestic market. A large and rising base of elderly population, rising per capita income, greater health awareness, competitive manufacturing capabilities and talented scientific manpower, make this sector a promising investment theme for the medium term. Any sector-specific investment opportunity does carry some cyclicality element due to environmental shifts and valuations. Hence, investors with more than a five-year horizon should look at the sector strategically.
What are the challenges and demand drivers for pharma stocks?
The sector is highly regulated and requires strong compliance capabilities from a quality and process point of view. US FDA scrutiny and local pricing regulations also impact near term performance of the pharma sector. However, it has many strong demand drivers, which offer investors a good opportunity for the long term.
India’s primary consumers are people over 50. Their numbers are estimated at 270 million and they are the second-largest cohort of 50 plus population. It is larger than Brazil’s total population and sevenfold the size of 50-plus population of Germany, which is regarded as one of the world’s aging societies. Demographic trends will lead to a sharp increase in India’s 50 plus population over the next 20 years, which will add significant growth opportunities.
This, along with global outsourcing and manufacturing opportunities, are the two biggest growth drivers. Besides, factors like improved healthcare spending, COVID-driven increased attention, rising health insurance and better diagnosis are leading causes for lifting the demand.
What should be investors’ course of action, while considering pharma funds as an investment?
A long-term systematic investment approach is a good way of participating in the sector, given its favourable long-term trends. India is seen as the pharmacy to the world for its manufacturing and scientific prowess. It is a sustainable, competitive advantage and the large domestic branded market also provides growth.
Which themes are going to play and where could one invest with a short and long-term view?
The most attractive themes for the sector include:
1) Domestic chronic opportunity, where a large number of new patient population is added regularly.
2) Global manufacturing opportunity where India can be the “pharmacy to the world”.
3) Domestic diagnostics opportunity, given a large population base and need for increased diagnostic facilities.
Most of these business models are efficient on capital and hence are shareholders’ value accretive.