Pharma funds worst sectoral performers in a year

The funds have shed 8.5%, even as Sensex has returned 16%; effectively that's a 25% underperformance

Pharmaceutical funds have emerged the worst performers among sectoral ones in the past year, trailing other categories such as banking, information technology (IT), fast moving consumer goods (FMCG) and infrastructure.  

In a year, pharma funds have shed 8.5 per cent, shows data from Value Research. In this period, the benchmark BSE Sensex has returned 16 per cent, implying these funds have underperformed the market by nearly 25 per cent.

According to experts, weak results from Sun Pharmaceutical and Taro Pharma, overseas arm of the Sun Pharma, as well a negative expectation from Glenmark, does not augur well for the sector. Taro Pharma is representative of the Indian generics business in the US. In terms of valuation, pharma stocks are trading at multi-year lows.

“Pharma funds are in the grip of a bear run and are likely to remain laggards in the short term. Only those with a long-term view should invest in these funds,” said Manoj Nagpal, chief executive officer at Outlook Asia Capital. 

According to Kaustubh Belapurkar, director of fund research at Morningstar Investment Advisor, investors in general, should stay away from sector funds and instead take exposure to pharma stocks through diversified equity funds. “Only those who are savvy and are capable of taking a call/view on the sector could look at the sector funds,” he said. 

Fund managers in diversified equity funds have been underweight on pharma. According to Morningstar, aggregate exposure to the sector declined by 52 basis points to seven per cent at the end of March, from 7.52 per cent a year ago. 

Indian pharma stocks have been de-rated by 10 per cent over the past one year but with price erosion expected to increase, a further de-rating is expected. “Higher price erosion leads to lower earnings growth and returns and therefore drives de-rating. We expect price erosion to increase to 10-12 per cent from seven-eight per cent currently due to higher competition from increasing FDA (US Food and Drug Administration) approvals, which we expect to grow greater than 50 per cent in the next two years… and increasing approvals of new entrants,” said a recent note by Credit Suisse. 

Apart from pharma funds, IT funds have also come under some pressure in the past year. These have given returns of 3.9 per cent. In comparison, banking, infrastructure and FMCG have given high double-digit returns — 39 per cent, 33 per cent and 24 per cent, respectively.