Are pharma sector funds the contrarian bet of 2018?Remember Pharma in 2015? It was the blue-eyed boy of the industry, even though sitting at the end of a multi-year rally. Sector funds on an average had trebled themselves in five years, amounting to an annualised (CAGR) return of about 44%. Investors watched it with a mixture of awe and fear – was there more in the offing or was the only way down?

The latter turned out to be the case over the next three years as Pharma vigorously underperformed the broader markets. The sector was dogged by adverse USFDA (US Food and Drug Administration) observations of plants owned by industry majors and an escalating trade tension between India and the US. The Pharma was and is an export-oriented sector and a period of rupee stability and appreciation did not help it.

As a result, cut to September 2018, Pharma funds find themselves exactly where they were in September 2015. The three-year return is 0.2%, meaning the sector has stagnated. This compares to a five-year return of 14.7% and a ten-year return of 17.3%, as of 14th September 2018.

The great stagnation has promoted a change in a great many fund mandates to ‘pharma and healthcare’ in the SEBI driven scheme reclassification. Thus, SBI Pharma Fund is now SBI Healthcare Opportunities Fund and UTI Pharma and Healthcare Fund is now UTI Healthcare Fund. The stagnation has also attracted a few newcomers – who may be smelling a powerful contrarian opportunity. ICICI Prudential launched ICICI Prudential Pharma Healthcare and Diagnostics (PHD) Fund and Mirae Asset, an ordinarily cautious fund house launched Mirae Healthcare Fund, both in June 2018.

The sector is by no means cheap and has rarely been so. ICICI Prudential PHD Fund has a price to earnings (PE) ratio of 37.7, Mirae Healthcare has a PE of 33.6 and Reliance Pharma Fund has a PE of 38. The price to book (PB) ratios of the three are in the order of 3.68, 4.28 and 4.18. Tata India Pharma and Healthcare Fund has a PE of 29 and PB of 3.5, SBI Healthcare Opportunities has a PE of 22 and a PB of 3.75. UTI Healthcare Fund has a PE of 32.2 and a PB of 4.17. However, the average sector returns have zoomed in the past year to 17.2%, driven partly by a collapsing rupee against the dollar. Pharma companies, being export-oriented, do better when the rupee depreciates against the dollar.

Those watching Pharma will have taken note of another sector that has boomed on the back of rupee depreciation and a valuation re-rating. IT funds have given 1-year returns of a whopping 55% and three-year returns of 14.6%. They have already captured much of the gain from rupee depreciation. It may well be time to pass on the baton to Pharma.

Staff Writer

This article is written by RupeeIQ editorial staff.