China's recovery from coronavirus outbreak, drug demand lift pharma funds

Easing of supply chain issues, hydroxychloroquine opportunity boost sentiments

Pharma funds are seeing a sharp uptick in returns, as China’s recovery from the Covid-19 pandemic has eased concerns on supply chain issues.

In addition, fund managers are also expecting pharma companies’ top lines to gain on the back of high domestic and global demand for hydroxychloroquine (HCQ). 

According to the data from Value Research, one-week returns of pharma sector funds stood at 6.3 per cent. Among equity categories, it was the only one to have given positive returns.

Fund managers say pharma funds face near-term challenges, but there are positive triggers, with Covid-19 cases in China coming under control.

“Worries remain in terms of transporting products from ports to plants. Further, labour issues at plants continue to impact, but companies are trying out things to keep production going with limited manpower,” said Meeta Shetty, fund manager at Tata Mutual Fund (MF), who is part of the fund management team of Tata India Pharma and Healthcare Fund.

 

 

“More importantly, the impact of supply chain issues, caused by the situation in China, has eased. Domestic companies have 30-40 days of inventory to deal with short-term challenges,” Shetty added.

Certain pharma stocks are seeing an upmove, as demand for HCQ —produced in large quantities in India — has seen a sharp pick-up as it is being given to Covid patients as part of the treatment.

In one week, listed entities producing HCQ have gained 18-22 per cent. Shares of Ipca Laboratories have gained 18.6 per cent, while Cadila Healthcare and Mangalam Drugs & Organics have risen 22 per cent each.

On Tuesday, India partially lifted the ban on HCQ exports, allowing it to be exported on a case-by-case basis. The US government has sought India’s support in procuring the drug. Fund managers have also said that the domestic pharma sector is in a bright spot due to a host of factors, besides Covid-related triggers.

“Pharma sector valuations had turned attractive on account of USFDA-related issues. Large firms are trading at all-time low multiples. Earnings have been on recovery mode since the last 12 months. While most sectors are likely to see significant negative impact due to Covid-19, the pharma sector will see less of an impact. Further, there will be a long-term positive impact from the higher focus on healthcare,” said Sailesh Raj Bhan, deputy chief investment officer at Nippon India MF.

“The sector is relatively under-owned. As the weight of the sector increases vis-à-vis the front line indices over the next few months, we could see a larger quantum of foreign passive inflows,” Bhan added.

In a one-week period, the Nifty Pharma has clocked gains of 8.1 per cent. Year-to-date, the index continues to remain in positive territory marginally, whereas other sectoral indices are in the negative zone. The benchmark Nifty has declined 27.8 per cent year-to-date.