Invest in pharma funds with a three to five year horizon

After a lull of over a year, Pharma funds have started offering positive returns. The pharma funds category has returned around 3.58 per cent in one week. The category has offered negative returns in the last one month (-4.14 per cent) and (-2.72 per cent) in the last one year.

“The outlook for the sector is positive and the trend is likely to continue, given the moderate valuations and expectations of rebound in earnings,” says Sailesh Raj Bhan, Deputy CIO, Reliance Mutual Fund.

The valuation of pharma sector has seen a meaningful correction in the last 12-18 months. According to Sailesh Raj Bhan, this correction is primarily due to delay on product approvals as key manufacturing plants of some large companies had FDA observations.


Bhan also says that the price erosion in US markets and significant currency devaluation in the export markets also impacted profitability of
the pharma sector.

The rise of the pharma sector can also be attributed to the falling rupee. “Because of the rupee fall, the pharma sector will gain directly. This is because pharma is an export-oriented sector,” says Ambareesh Baliga, Market Analyst.

Overseas factors are also boosting the fortunes of the sector. Indian Pharma sector has dominant position in US generics market with over a quarter of all approvals in US generics coming from Indian companies. Experts believe that a favourable policy environment under the new government in US led by Donald Trump will support generics growth in the US.

With valuations already in the attractive zone post the correction and the improvement in product approvals over the next two years, the sector is well poised to recover from its underperformance of the last 12 months. “The outlook for the sector is positive. Post this correction, the valuations of the sector are attractive, given the likely improvement in product approvals and rebound in earnings,” says Sailesh Raj Bhan.

Sailesh Raj Bhan asks investors to invest with a three to five year investment horizon in the pharma sector. “Domestic pharma market is highly under penetrated with strong long term growth potential. The secular nature of the sector provides good opportunity for long term investors with over 3-5 year investment timeframe,” he says.

At a time when the equity markets are performing badly, defensive sectors like Pharma are supposed to remain shock-proof from events like demonetisation. This is because of the critical need of the products for consumers. Also, a large part of earnings of Indian pharma companies now comes from international markets which also will act as a buffer to some temporary loss of domestic volumes.