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S. Vaidya Nathan

Magnum Pharma: Sell Franklin Pharma: Sell UTI Pharma: Book profits partially

INVESTORS in pharmaceutical sector funds can cut exposures as the sharp rally in pharma stocks over the past three months provides a good exit opportunity.

The net asset values (NAVs) of the Franklin Pharma Fund, SBI Magnum Pharma Fund and UTI Pharma and Healthcare Fund are well above the Rs 10 at which initial investors would have taken exposures.

These funds have been around for about three years now. But they have generated only returns of 4-7 per cent per annum.

During this period, the prices of a host of Indian pharmaceutical companies have risen manifold. Indian pharma companies have outpaced their MNC counterparts comfortably. The latter have, however, had a better run in 2003.

With the kind of re-rating that pharma stocks have enjoyed, one would have expected a better performance from the pharma funds. But the trends in the prices of Indian and MNC pharma stocks have often tended to be counter-cyclical. Also, trends in large-cap and second- and third-rung pharma stocks have been different in terms of direction of price and/or magnitude. Here, too, a heavier allocation to one class at the wrong time has affected performance.

These trends are likely to be an integral feature of the pharma sector. The experience of the past three years shows that it is not easy make a high proportion of correct calls on which set of pharma stocks would hold scope for good returns, and when to enter and exit stocks.

This effectively means that pharma-specific sector funds may find it tough to deliver returns that compensate for the high risks involved in any sector fund. Investors may be better off investing in diversified funds with a good track over a period of time. In this backdrop, investors can act on the following lines:

Magnum Pharma Fund: It has to 54 per cent of assets in mid-cap pharma stocks such as Shasun Chemicals, Jupiter BioSciences, Aurobindo Pharma, Glenmark Pharma, Ind-Swift, United Phosphorus and JB Chemicals.

The risks involved in such stocks are high. The room for upside exists but investors may be better off in not waiting to sell at the top. NAV gains may be limited. Investors can make opportune use of the price run-up as an exit opportunity.

Franklin Pharma: The 40 per cent rise in the NAV over the past three months and 25 per cent over the past year can be capitalised upon by investors.

But the presence of Lupin, Wyeth Lederle, Monsanto, Wockhardt and Jubilant Organosys have provided a boost to the NAV. Investors can cash in on the gains in NAV.

UTI Pharma Fund: This fund has a sharp focus on frontline pharma stocks where the downside risks are limited. These stocks could also enjoy a further re-rating as the new patent regime kicks in 2005. Investors can partially cut their exposures now.

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