Coronavirus effect: Is ‘pharma, healthcare diagnostics’ the next big bull theme for Indian markets?

Pharma, healthcare and diagnostics had 5.66% allocation in diversified MF portfolios; the 5th highest sectoral allocation behind banks & finance, software, consumer non durables and petroleum products

Kumar Shankar Roy Mar 27, 2020

IDBI healthcare fundIndia has established itself as a global manufacturing and research hub in pharmaceutical space. Healthcare has become one of India’s largest sectors. And, diagnostics is riding high on rising awareness of preventive healthcare. But, nothing could have hard-sold the case for investing in PHD (Pharma, Healthcare and Diagnostics) sector more than the global coronavirus outbreak. After over 500,000 confirmed global cases and 22,340 deaths, the world will never see health in the same prism as it did earlier. Coming to our topic, it has been seen that the leaders of a bull market never lead the next rally. Financial and consumer sectors led the last rally. So, the market knows the next rally could be led by someone else. Is ‘PHD’ the next big bull theme for Indian equities? How are mutual funds positioned? To know more, read on.

Theme talk

India has established itself as a global manufacturing and research hub in pharmaceutical space. We are one of the largest in terms of volume and 13th largest in terms of value. Indian pharmaceutical companies are currently going through a rough patch. Under-performance compared to broad market makes strong case for investment. In fact, pharma has been a contrarian bet for a long time. Stocks like Glenmark, Strides, Lupin, Sun Pharma, Aurobindo Pharma, Natco, Cipla, Novartis and GSK Pharma have dropped from a 3-year perspective. If you widen the time horizon, you will see lot of names figuring in that list too.

Hospitals have faced a similar fate. Be it Apollo Hospitals, or Fortis Healthcare, the last few years haven’t been great for them. But, hospitals is a long-term theme. Medical tourists, who choose India as an affordable destination for elective surgeries, contribute almost 10-12% to private hospitals’ sales. Together with pharma, the healthcare theme is considered by markets as a defensive theme. In the last few years, some diagnostic chains and plays have come to the market like Dr Lal Pathlabs and Thyrocare. The broader PHD segment is a pocket where the market takes refuge when everything drops. Apart from them, IT sector is renowned for being a defensive bet thanks to large dividends, debt-free status and cash-churning business.

PHD theme will be approached in a very different way than earlier. This is because today India has realised that doctors, nurses, hospitals, medicine companies and laboratories are more important than bankers, loan givers, retail outlets, cinema halls, airlines etc. In the face of coronavirus (COVID-19) crisis, the financial markets are collateral damage of health and economic challenges.

When this crisis blows over, we expect healthcare to get its due, not just in government spending, but also in the markets. PHD businesses are capital-intensive businesses, require a high degree of specialisation and cannot be built overnight. So, companies with a foot-hold cannot be overnight challenged i.e. loss of competitive edge to new rivals.

Healthcare has the potential for becoming the next bull market leader. “New leaders–healthcare, IT services and telecom. We’re in the midst of dislocations and a rampaging virus; time to step back, think hard and build an investing playbook,” says Aditya Narain of Edelweiss Research.

How are mutual funds positioned

If you look at how MF portfolios are structured today, and this is at an industry-level, we can see that funds have bet big on banking & finance (financials), followed by software, consumer non durables and petroleum products. PHD (pharma & healthcare) have only 5.66% allocation. This the 5th highest allocation behind the above mentioned sectors/segments. Take a look at the table below to see how equity mutual funds are positioned sectorally.

Sector break up in MF holdings

Sector Classification Amnt (in Rs Cr) % of Eqt AUM
BANKS & FINANCE 419140.15 34.69
SOFTWARE 97294.1 8.05
CONSUMER NON DURABLES 93947.01 7.77
PETROLEUM PRODUCTS 64712.59 5.36
PHARMACEUTICALS & HEALTHCARE 68327.86 5.66
CONSTRUCTION PROJECT 44622.11 3.69
AUTO 40642.57 3.36
POWER 38123.2 3.15
CEMENT 36229.01 3.00
CONSUMER DURABLES 34949.52 2.89

If you look at how funds tweaked portfolios in terms of sectors in February 2020 versus January 2020, pharma stocks have seen rise in investments. “Among other sectors, Pharma has seen a meaningful increase in weights,” says Sunil Tirumalai, Head of Research and Strategist, Emkay Global.

Pharma sector saw about 40 basis points weight rise in February 2020. This is the 2nd largest increase among sectors. Consumer sector saw the highest in 51 basis points.

Even at the end of January 2020, top sectors where ownership of mutual funds vis-à-vis BSE-200 was at least 1% higher included healthcare sector (10 funds over-owned), as per Motilal Oswal Research.

One way to play the PHD theme is through sectoral funds like Nippon India Pharma, ICICI Pru Pharma Healthcare & Diagnostics, SBI Healthcare Opportunities, Mirae Asset Healthcare, UTI Healthcare, DSP Healthcare, ABSL Pharma & Healthcare, Tata India Pharma & HealthCare and IDBI Healthcare.

The other way to play is through diversified mutual funds. In this route, the sectoral allocation depends on the fund manager views. Do keep in mind that sector-specific funds are a much riskier option than diversified funds, because sector-specific schemes are concentrated bets. Conversely, equity diversified funds can hike their PHD exposure if the benchmark indices give more weight to pharma, healthcare stocks.

MF holdings sector composition

It is still early days for calling out the next bull market leaders, but it would be worthwhile for investors to keep an eye on pharma, healthcare and diagnostics segments in the future. Given the long-term nature and the beaten-down valuations of many such stocks, there remains a chance of re-rating happening in these stocks.


Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at kumarsroy@rupeeiq.com.

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