Fund managers make contrarian bets on pharma stocks

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When the sentiment towards the pharmaceutical sector had turned sour in May, several fund managers took contrarian bets, lapping up leading stocks in the segment.

Sun Pharmaceutical Industries emerged as their top choice and equity mutual funds (MFs) added nearly 15 million shares of the firm to their portfolios. Their net investment in the drugmaker was nearly Rs 745 crore, even as the stock slipped from Rs 600 to less than Rs 500 in a matter of days.


Other drugmakers that saw MF buying included Dr Reddy's Lab, Cipla, and Aurobindo Pharma. It is interesting to note that no pharma stock, with the exception of Lupin, featured in the list of stocks that saw maximum MF selling during May.


Fund managers have been eyeing the pharma sector for a few quarters now. However, headwinds such as the increased pace of US Food and Drug Administration (USFDA) observations and fears over pricing following the new administration in the US have kept them in wait-and-watch mode.


“Pharma companies are the segment we are looking at. There are a couple of select stocks that could make a good buy at current levels,” said Mahesh Patil, co-chief investment officer (co-CIO), Birla Sun Life Mutual Fund, in May.


Other fund managers had a similar view on the sector. ICICI Prudential Mutual Fund and UTI Mutual Fund were among the fund houses that bought the Sun Pharma stock the most. For instance, ICICI Prudential bought stocks of Sun Pharma worth Rs 764 crore while UTI MF put in Rs 82 crore.


ICICI Prudential’s three schemes — Value Discovery, Focused Bluechip, and Balanced Fund — are among the top three schemes having the highest investment (actual) in Sun Pharma.


Value Discovery, managed by Deputy CIO Mrinal Singh, is bullish on Sun Pharma as the scheme has pumped nearly 8 per cent of its corpus, or Rs 1,385 crore, into the counter.


A chief investment officer of a fund house said: “Our bets on Aurobindo and Sun Pharma in May have turned out to be good calls. We may add more of pharma counters as these are becoming value picks from a two- to three-year perspective.”


Funds from the basket of HDFC Mutual Fund have an exposure to Aurobindo Pharma. For example, HDFC Equity and HDFC Top 200, both managed by CIO Prashant Jain, are among the top schemes having a higher amount of investment in Aurobindo Pharma. Birla Sun Life Frontline Equity, managed by Mahesh Patil, also has invested 1.4 per cent of its assets, or Rs 243 crore, in Aurobindo Pharma.


Pharma funds have lost their performance track record over the past two years.


This segment was among the top-performing before 2016. Even today, from a three- to five-year perspective, pharma funds have given an annualised return of 12-19 per cent. However, over the past one year, the performance of these funds has slipped with category average returns falling to minus 4 per cent.


Fund managers go shopping for pharma stocks
Company No of shares held in April (in million) No of shares held in May (in million)
Sun Pharmaceutical Ind 128.7 142.8
Dr Reddy's Laboratories 8.2 9
Cipla 66.3 67.2
Aurobindo Pharma 69 72.8
Lupin 23.5 22.8

Source: Value Research Online

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