Things are further improving for companies focussed on the US. Many large generic US players are moving out of certain drugs, which creates opportunities for the Indian players. “Many pharma companies have also diversified to various other geographies such as the UK, Russia, Africa, and so on. They have tried to reduce their dependence on the US market, even though it remains the most lucrative market,” says Danesh Mistry, fund manager, Tata Mutual Fund. Due to all these factors, the earnings visibility for these players has improved.
As for the domestic-focused players, the market has decided to re-value them. “Many of them have branded drugs. In recent times, the market has re-rated these as it feels that these brands have strong and sustainable equity in the Indian market,” says Mistry.
While the regulator risks exist for the US-focussed players, fund managers say that the sector will continue to perform well. “The valuations of the pharma companies are not high yet. They are in line with the broader markets. We may see earnings recovery driven by currency weakness, stabilising US market and growing domestic market,” says Bhan.
Pharma sector funds have outperformed diversified equity schemes even over the long-term giving annualised 17.86 per cent returns over the past decade. Despite the long-term track record, mutual fund analysts suggest that if retail investors want to take exposure to these funds, they should only do it through an advisor. “The entry and exit into these funds need to be timed — not an easy task for a retail investor with limited resources. Unless there’s professional guidance, small investors can avoid taking exposure to pharma sector schemes or for that matter any sectoral funds. Even if they do, they should restrict it to five per cent of the equity portfolio,” says Kaustubh Belapurkar, director, fund research, Morningstar Investment Adviser India.
Most sector funds form a small part of the economy, and they also carry a high concentration risk. The only sector fund that has a larger contribution to the economy is banking. “Banking is also broad-based with public sector banks, private banks and non-banking finance companies and domestically driven,” says Belapurkar.