 "Mutual Funds")
New fund offers of two health care-themed mutual funds — the DSP Nifty Health care Index Fund and the Baroda BNP Paribas Health and Wellness Fund — are currently open for subscription. The pharma and health care category has delivered a robust average return of 15.8 per cent over the past year, making it the second-best performing equity category during this period.
Structural growth drivers
Life expectancy has tripled over the past century, according to the World Bank. “The longer the lifespan, the greater the propensity to use medicines and allied services,” says Sanjay Chawla, Chief Investment Officer – Equity, Baroda BNP Paribas Asset Management Company (AMC).
India’s health care spend, at less than 4 per cent of GDP, lags behind countries such as Brazil, China and South Africa, where it ranges between 7–9 per cent.
“Spending on health care is expected to grow faster than per capita GDP as India moves towards becoming a middle-income country,” says Shibani Sircar Kurian, Senior Executive Vice-President, Senior Fund Manager and Head – Equity Research, Kotak AMC.
Strong prospects across sub-segments
The health care sector includes pharma companies, hospitals, diagnostics, and CDMO (contract development and manufacturing organisation) — each of which has distinct growth triggers.
Domestic sales dominate pharma companies’ revenues. The Indian branded pharma market generates around $27 billion in revenue. “Rising disposable incomes, awareness, and insurance penetration are expected to be the key drivers for the performance of these funds,” says Vrijesh Kasera, Fund Manager, Mirae Asset Investment Managers (India).
Increased incidence of lifestyle diseases (like hypertension, diabetes and obesity) is likely to drive sales momentum in the domestic pharma industry.
Internationally, the US remains the largest market for Indian pharma, accounting for over 40 per cent of the generics sold there by volume. Kasera expects exports to developed markets to grow further, driven by patent expiries and increased filings.
“Indian companies are graduating from suppliers of generic medicines to speciality and complex generics. This should increase their profitability structurally,” says Kurian.
India also benefits from a strong base in chemistry-related services, improving intellectual property protection, and better governance. India has the highest number of GMP (good manufacturing practices)-approved plants outside the US.
Contract research and manufacturing is an emerging growth area. “Many innovative companies are looking at outsourcing part of their research and development (R&D) and manufacturing to India for cost saving. India, with its respect for patent laws and low-cost manufacturing, may become a key partner in supply chains,” says Chawla.
Kurian observes that the demand shift being witnessed in the CDMO sector to India, as an alternative to China, is expected to continue for many years.
Hospitals are becoming corporatised. Most capacity expansion is happening via brownfield projects. Besides offering volume growth, this will lead to increased profitability in the longer run.
Policy risks
External risks include potential tariffs on Indian pharma exports to the US, which are currently exempt from additional tariffs. These tariffs could impact the margins of generics, at least in the near term. Compliance lapses at Indian manufacturing facilities could also disrupt exports.
Several threats exist in the domestic market as well. “The rise of generics in what is primarily a branded market could impact growth and profitability,” says Kasera.
“The government has tried to put in price ceiling for branded products. That accounts for about 18–20 per cent of the portfolio of companies,” says Chawla.
Kurian adds that if there is a significant increase in the scope of these price control measures, profitability may be significantly impacted.
Future regulation may also extend to hospital pricing.
Health care valuations are currently elevated. “The sector is trading at one standard deviation over its historical mean,” says Kasera.
Who should invest?
These funds are suited for long-term investors. “Investors with a medium-to-long-term investment horizon looking to diversify their portfolio into a sector with low volatility may consider pharma, health care and wellness theme-based fund,” says Chawla.
Vishal Dhawan, Chief Financial Planner, Plan Ahead Wealth Advisors, suggests that investors may take exposure to these funds as a possible hedge against rising medical costs.
“These funds carry risks stemming from international markets. Investors who only want a domestic exposure should also avoid these funds,” says Dhawan.
Dhawan recommends limiting exposure to these funds to 10 per cent of one’s equity portfolio, with an investment horizon of 5–10 years.
He adds that aggressive investors should look at active funds for alpha generation, while those with a moderate risk profile should go for passive funds in this space.
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