Material impact of the COVID – 19 pandemic and National lock-down has been catastrophic for Financial Markets. Sector wise / Industry Business impact though apparent can be better gauged once the lock down clears. Meanwhile we contrasted various sectors current valuations with past data. While many sectors have corrected sharply, with better suited macros and torn down competition from China for intermediates and APIs, Pharma sector valuations stand affirmative for Investment opportunity:
Strengths v/s Weakness
- Some windfall gains expected due to export of Covid 19 related medicine and currency depreciation (ease in international regulatory issues, at least temporarily).
- No meaningful earnings impact due to Covid 19 disruption.
- Given the pandemic, Government policy focus and allocations are expected for the sector – structural long-term boost to the sector.
- Reduced labor availability due to lock down.
- Raw material scarcity if Covid 19 resurfaces and leads to supply disruption.
Pharma (~ 13%) has substantially outperformed Nifty 50, (~ – 25.8%) since Jan 2020 and should continue to grow at a handsome rate given valuations & positive outlook for the sector.
Most Fund Managers have reduced ‘underweight stance’ on the sector and are now equal or overweight. In a portfolio of diversified equity Mutual Funds, expect around 4% to 6% of pharma weight currently. Given the weak economic outlook and comfort for this sector (both valuation and business wise), one may look at an additional 5% (of equity allocation) exposure to pharma funds for the near term.
Funds to look at:
- Nippon India Pharma Fund – FM Shailesh Raj Bhan has been managing this fund for over 10 years and has delivered more consistent performance amongst peers. The current portfolio focus is on domestic-oriented companies.
- DSP Healthcare Fund – FM Aditya Khemka – 13 years of experience of working in Pharma companies and also, as a pharma analyst adds to the comfort. This fund is aggressively positioned with higher exposure to mid/small pharma companies and some international companies as well.