Pharmaceuticals companies, which have recently underperformed, are an option for contrarian investors seeking for a sectoral bet following the rapid surge in broader markets, according to fund managers and experts. They said that despite the ongoing impact on some pharmaceutical firms' profitability, their share values were lower. Investors who are unsure of which stocks to choose might want to think about mutual fund schemes that invest in pharmaceutical companies.
The Nifty Pharma Index has lost 12.4% over the last year, compared to the benchmark Nifty 50's 1% increase. In the last year, mutual funds that invested in pharmaceutical companies have lost 14.2% on average. According to Value Research, they have lost 12.4% on average so far in 2022.
Fund managers said that the underperformance had reduced sector values.
Despite being at 22.5 times, which is in line with the 10-year average, the projected Price to Earnings (PE) ratio—a prominent valuation metric—has lost some of its premium over the overall market.
According to Vrijesh Kasera, manager of equities funds at Mirae Asset Investment Managers, the premium over the broad BSE 100 has decreased to 13% from an average of 34% over the previous ten years.
Investors may stagger their wagers in the industry over the next three to six months, according to fund managers, given the pressure on their earnings has not yet subsided.
Large corporations continue to have troubles with the USFDA, and after a pause in 2020, pricing pressure on US generics has increased, according to Kasera.
Fund managers believe businesses in this sector are considerably better positioned to pass on increased prices to customers and can sustain margins given that inflation is predicted to stay high internationally.
"Companies in the branded generic and hospital business, which make up one-third of the healthcare index, performed well, but the API, unbranded generic, and diagnostic space, which make up the remaining two-thirds of the weight, underperformed due to fierce competition, price pressure, and higher raw material costs," said Aditya Khemka, fund manager for InCred PMS, which manages a healthcare fund.
A decline in raw material prices from their high may ease margin pressures for branded generics, hospitals, diagnostics, and APIs.
The pressure in the US has significantly reduced, according to firms and fund managers, and medical tourism is returning to normal.
According to Khemka, a surge in medical travel after Covid relaxations globally is projected to boost hospital profit margins. Although worries about US generics persist, branded generics may do better as raw material price pressure eases and brands have greater pricing leverage.
Investors might devote 5–10% of their equity portfolios to the pharmaceutical industry, according to financial advisors. Rupesh Bhansali, head (distribution), GEPL Capital, stated that pharmaceutical companies are "cash positive with the ability to pass on increased cost and are less impacted in an inflationary environment as purchase is unlikely to be postponed."
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