Coronavirus-induced lockdown in China can put the brakes on pharma funds

The continued lockdown in parts of China triggered by the Coronavirus outbreak can put brakes on the stellar performance shown by pharma funds in recent months. Fund managers feel domestic pharma companies can face challenges if supply-chain issues in China continue for another couple of months.

In one-year period, pharma funds have given average returns of over 18 per cent, outperforming 12 per cent gains posted by frontline indices such as Sensex and Nifty.

"Domestic pharma companies, which are importing raw materials from China, have inventory for one or two months. But, if there is any prolonged impact, it can lead to some production disruptions," said Mahesh Patil, co-chief investment officer of Birla Sun Life Mutual Fund (MF).

On Thursday, Icra revised its outlook on Indian domestic pharma from stable to negative due to ongoing lockouts in parts of China. The rating agency pointed out that domestic pharma industry is heavily dependent on Chinese imports for raw-materials, with China accounting for 65-70 per cent of active pharmaceutical ingredients (APIs) and other intermediates coming into India.

The rating agency underlined that the situation can get more alarming in cases of some key starting materials or KSMs, where China is the exclusive supplier.

In another note, rating agency Crisil pointed out that India continues to lack capability to produce KSMs or intermediates manufactured in China and cited spikes in raw-material costs, already seen by some domestic pharma players.

Experts say that domestic pharma industry may still be able to maneuver around the supply-chain issues if the situation turns more acute.

"We could see domestic API manufacturers increase their capacity to meet the demand caused due to Chinese cutbacks. Given the importance of the sector for the society, government is also expected to ensure that there are major challenges," said Sailesh Raj Bhan, deputy CIO at Nippon India MF.

Meanwhile, the share prices of domestic API players have been seeing a strong run-up amid expectations of higher demand due to Coronavirus-triggered lockdown in China.

In year-to-date, these stocks have given returns of 30-100 per cent. Some of the top-gainers include Granules India (42 per cent), Shilpa Medicare (73 per cent), Lasa Supergenerics (120 per cent) and IOL Chemicals & Pharmaceuticals (50 per cent). On Monday, some of these stocks continued to see an uptick even as markets declined two per cent over fears of Coronavirus outbreak. Shares of IOL Chemicals were up 8.3 per cent, Lasa Supergenerics and Shilpa Medicare were locked at upper circuit of 5 per cent.

Domestic pharma companies have also created captive units to procure their API needs, which could help in off-setting impact of slowdown in Chinese production.

"Some companies have been creating captive units as part of their backward integration programme," Patil pointed out.

"Only if Chinese situation does not improve over the next one to two months, some challenges can emerge for Indian pharma companies," Bhan added.

Further, fund managers say any near-term correction in prices can be opportunity for investors to add to pharma exposure with overhang pertaining to price erosion of generic drugs easing and improved visibility of future growth.

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