Healthcare index suffers as FIIs shift focus

Foreign funds are moving away from pharma stocks as they find shares of emerging sectors such as infrastructure and retail stocks offering better returns, resulting in the Bombay Stock Exchange (BSE) healthcare index (HCI) underperforming the Sensex in the past one-and-a-half years, says a study by Avendus Advisors.

The healthcare index had moved in tandem with the Sensex in the last five years, but it is beginning to underperform the benchmark index in the last 18 months.

"Foreign institutional investors (FIIs) account for 67 per cent of the institutional stakeholders in pharma stocks. Promoters and management groups are the other big stakeholders, but they rarely trade their stocks . Therefore, price leadership of the Indian pharma companies is driven by FIIs," said Rajiv Shukla, head of life sciences practice at Avendus Advisors.

The 2001-02 period saw increasing FII participation in Indian capital market. But, over the time, FIIs have become more sophisticated in their market understanding and selective about companies and increased their involvement in the mid-cap space, the study noted.

Indian generics majors such as Cipla, Ranbaxy, Dr Reddy's Lab, Sun Pharma constitute more than 50 per cent of the market cap of the healthcare index while the MNC such as Pfizer, Glaxosmithkline, Wyeth, Aventis and Novartis constitute 13 per cent of the index.

"While the returns from the HCI beat the Sensex between March 2002 and September 2005 with a total return of 125 per cent versus 116 per cent, the HCI has consistently underperformed the Sensex since then," said the Avendus study.

The main reason for this is the underperformance of the MNC pack in the HCI. It was expected that MNCs would rule the roost from 2006 onwards.

However, this did not happen. Avendus Advisors said continued reluctance to launch novel products over concerns on IP protection and lack of aggressive deal-making and expansion of Indian presence also hindered the progress.

Besides, a small proportion of MNC value chains (R&D, manufacturing) are based in India with their Indian affiliates primarily serving as sales and marketing offices.