Why pharma stocks are underperforming despite Rs 2.23 trn Budget allocation

Much of the increase in this year's Budget allocation for health and well-being is attributed to expenditure set aside for Covid-19 vaccination

Union Budget 2021, which was presented amid a global health crisis, was sketched with 6 pillars in focus. Among these, healthcare was the foremost agendum of Finance Minister Nirmala Sitha­raman’s Budget speech, and the sector was allocated a generous pie of the entire budgetary allocation.

At Rs 223,846 crore, the sector's allocation jumped around 118 per cent over the Revised Estimate of the current fiscal year. Yet, stocks from the sector have been underwhelming at the bourses. READ ABOUT IT HERE

The S&P BSE Healthcare index is up just 1 per cent on the BSE today, at 20,891.5 levels, as against an over 2 per cent gain in the S&P BSE Sensex. In the past two days, the Sensex index has jumped nearly 4,000 points or 7.2 per cent, compared with the Healthcare index’s 1.2 per cent gain.

So why have investors not paid heed to the sector?

Devil is in the detail

A fine-print of the Budget would throw light on the fact that the increase in allocation, pegged at 137 per cent by the finance minister, was calculated over the Budget Estimate of 2020-21 and not the Revised Estimate. Moreover, much of the increase in this year’s allocation for health and wellbeing is attributed to expenditure set aside for Covid-19 vaccination and the finance commission grants for water, sanitation and health, and overall allocation to drinking water and sanitation.

"Allocation to the core healthcare sector has been at Rs 76,900 crore for FY22 relative to Rs 82,440 crore (FY21RE) and Rs 69,230 crore (FY21BE). This implies 7 per cent decline versus FY21RE and growth of only 11 per cent against initial FY21BE allocation," notes a Budget review report by Prabhudas Lilladher.

Concurring with the view, a JM Financial report said that the allocation for Covid-19 vaccine could be underestimated by nearly Rs 30,000 crore if the government intends to inoculate the entire population free of cost.

"The total allocation of Rs 2.23 trillion also covers areas such as nutrition, vaccination, drinking water and sanitation (driven by Jal Jeevan mission (urban)), and finance commission grants for the same. Thus, core health spending still remains subdued," it pointed out.

Investment strategy

According to AK Prabhakar, head of research at IDBI Capital, the Budget’s focus laid emphasis mostly on the country’s vaccination drive. Therefore, not many mainstream pharma stocks are bound to benefit from the announcements.

The FM announced a Rs 64,180-crore 'Aatmanirbhar Health Mission' which would be spread over six years including setting up of 17,000 rural and 11,000 urban health centres; setting up of integrated public health laboratories in each district; 3,382 block public health units in 11 states etc.

In this backdrop, Prabhakar says one can look at active pharmaceutical ingredient (API)-based stocks, vaccine manufacturers’ stocks or hospital/equipment maker stocks at the most.

"While we await for roadmap for the new ‘Aatmanirbhar Scheme’, the higher government investment boosts healthcare penetration and creates a favourable ecosystem for hospitals and diagnostics to expand. Overall, the proposals are positive for the sector," said a report by Edelweiss Securities.

Siddhant Khandekar, analyst at ICICI Securities, too, opines that the sector remains in a consolidation mode after a sharp outperformance in calendar year 2020. And with no specific announcements from the Budget, "investors are switching from defensives to cyclical stocks" to leverage on the growth theme, he says.

That said, he remains positive on the sector from a long-term perspective as fundamentals remain strong going ahead.

In CY20, the S&P BSE Healthcare index zoomed 60 per cent at the bourses, as against a 15 per cent rally in the frontline Sensex index. However, over the past one month, the sector index has declined around 5 per cent on the BSE, relative to around 2 per cent gain in the Sensex, ACE Equity data show.

"Domestic investors are focusing on the sectors that the government is prioritizing. This Budget stressed more on capex, infrastructure creation, banking recapitalization/privatization than pharma in general… Therefore, there is a shift towards such sectors," says Surajit Pal, research analyst at Prabhudas Lillahder.

Investors, he says, are booking profit in the sector that has done well over the pat one-year and are deploying this profit in other sectors to generate further profits.