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| Pharma fund returns should be even better in future, keeping in mind the bright outlook for the sector and the booming markets |
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| Equity funds have done exceedingly well during the past few months - as one would expect, given the boom. Guess which categories of funds performed the best? No prizes for this one: diversified funds have done the best, given the broad-based nature of the rally. |
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| But interestingly, some sector funds have also done well. Pharma funds take the cake, giving an 89.38 per cent return on an average over a one-year period, just behind diversified funds with 93.29 per cent. |
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| Pharma has been among the hottest stories this year, and the success of domestic pharma-specific funds is, therefore, more or less on expected lines. |
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| Out of the four pharma-specific funds operating in India, only three are pure dedicated funds in the sector. |
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| Of them, SBI Mutual Fund's Pharma Fund takes top honours in the yearly returns stake with 105.70 per cent, followed by Templeton's Franklin Pharma Fund (85.56 per cent) and UTI Mutual Fund's Pharma & Healthcare Fund (76.89 per cent). |
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| The only other fund which has a big pharma exposure (though not a dedicated fund in the true sense of the term) is Alliance Capital's Alliance Buy India Fund. It came in last in the category with 73.31 per cent. |
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| The good performance of India's pharma sector and hopes of better times for Indian companies have contributed to this success, say fund managers. |
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| "Indian companies have restructured their operations keeping in mind the huge export opportunities. After a period of declining growth rates and falling margins, and keeping in mind the post-2005 change in the patent regime, Indian companies realised the need for a change in strategy," says Sandip Sabharwal, fund manager of SBI Mutual's Pharma Fund. |
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| Big companies and small contributed to this makeover. "The trend was started by companies like Ranbaxy, Dr Reddy and Cipla. The strategy of focusing on exports was reasonably successful. Now, smaller companies have followed the lead successfully, thus improving sector fundamentals," notes Sabharwal. |
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| Nimble portfolio management, combined with regular profit-booking, has also helped domestic pharma funds to come up with handsome returns. |
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| A look at the portfolios of pharma funds reveals that the focus has gradually shifted from large stocks like Ranbaxy and Dr Reddy to mid-cap scrips like Divi's Labs, Wockhardt and Shasun Chemicals. |
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| According to analysts, opportunities in the lucrative global generic markets, domestic growth prospects and hopes of big orders in contract manufacturing and research and development from global majors post-2005 are driving sentiments as far as mid-cap pharma companies are concerned. |
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| According to Sabharwal, "Indian firms are already looking at doing contract research for global companies and building up capacities. Indian companies have also started tying up with marketing companies abroad to leverage their distribution chains in global markets. Another opportunity lies in clinical trials which global companies are planning to outsource to India," adds Sabharwal. |
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| The fund managers' preference for mid-cap pharma stocks is also driven by the valuation factor. "There was a huge valuation gap between leading Indian companies like Ranbaxy, Dr Reddy's and mid-cap companies. That is now being bridged since mid-cap pharma companies also have access to international markets," says an analyst from a prominent research firm. |
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| "The export story is now being populated by mid-cap companies as well. The prospects of expanding margins and good financial performance are forcing fund managers to look at these companies. These firms are also expected to win several USFDA and international approvals for their products," he adds. |
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| Sabharwal agrees. "Considering the potential of the markets abroad, even one or two successes can change the fortunes of Indian pharma firms," says he. |
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| MNC healthcare stocks have also been in demand of late, with stocks like Pfizer, Aventis and Wockhardt featuring prominently in fund portfolios. The impending change in the patent regime come-2005 is a long-term trigger for MNC companies, say analysts. |
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| "The change in the patent regime will enable MNC firms to introduce their own products in the domestic markets, thereby improving their prospects. Most of these companies have also improved their operational efficiencies by shutting down non-performing plants and through other cost-cutting measures," he points out. |
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| Apart from a focus on mid-cap and MNC stocks, fund managers have also been smart on timing the markets. There are worries though. The pharmaceutical sector's benchmark index, the BSE health care index (92.38 per cent), outperformed the average one-year return offered by pharma funds (89.38 per cent). |
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| Even though the difference is not much, fund managers face the risk of imbalance in their portfolio vis-a-vis large, mid-cap and small-cap pharma stocks. A heavier allocation to one class at the wrong time has affected performance in the past, admits fund managers. |
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| However, Sabharwal is of the opinion that prudent management of funds will help minimise risks. |
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| "While the large-cap counters provide good trading opportunities, our strategy regarding these scrips is to make strategic trades at the right time and then book profits. We have also invested in mid-cap stocks at an early stage and consequently have been able to reap the rewards," explains Sabharwal. |
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| Going forward, fund managers expect pharma fund returns to be even better, keeping in mind the bright outlook for the sector and the booming markets. |
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| "I am happy with the current returns that pharma funds have been able to generate and the outlook remains extremely positive," says Sabharwal. |
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| And the future may be more about actual performance than any sentiment-driven rally based on potential. |
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| "So far the bullish trend in the pharma sector has been on the back of potential. Once the companies start delivering on their promises, there will be even more positive traction for these firms. Add India's good economic growth prospects, and the overall picture looks rosy indeed," adds Sabharwal. |
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| "The outlook is extremely good for the next five years at least," says another analyst, while pointing out that the growth prospects of pharma companies post-2005 makes pharma funds assured bets for the future. |
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