MFs play safe with healthcare stocks

Stocks in the pharma and healthcare space have been much favoured in the rally since March 2020, buoyed by the opportunity from the pandemic outbreak. But mutual funds (MFs) have been selective about picking stocks from these segments.

An analysis of shareholding pattern of pharma and healthcare stocks since March 2020 shows that while MFs have increased their shareholding in hospitals and certain large-cap pharma companies, holdings in diagnostic labs have seen a decline, as valuations sky-rocketed.

Interestingly, the much-trumpeted China +1 and import substitution in API have found only a mixed and lukewarm interest from MFs. Their shareholding in custom synthesis companies — which have traditionally attracted high interest in the last decade — has also shrunk since the Covid outbreak.

Large-cap gainers, losers

MF shareholding in large-cap pharma stocks accelerated from March 2020, as the defensive play on Covid boosted the trend which had started since 2015.

Holdings in large-caps such as Lupin, Sun Pharma and Dr Reddy’s, improved from a range of 3.2-3.5 per cent in December 2015 to 8.8-10.9 per cent in March 2020 and further to 11.7-13.3 per cent by September 2021 (latest available data). These institutional investors may have positioned themselves for the rejuvenated product profile of speciality products at Sun Pharma and complex portfolios of Lupin and Dr Reddy’s, which are driving the next leg of earnings growth.

On the other hand, other large-caps such as Aurobindo Pharma and Cadila, which invested in vaccine development (without a strong outcome so far) and Cipla, which had high MF participation by March 2020 itself, have witnessed a moderate tapering off in MF shareholding since March 2020.

Biocon, another large-cap stock too, saw a decline in MF shareholding. Biosimilars gaining traction in a marketplace hampered by Covid restrictions could have impacted growth assumptions.

Shareholdings down

Valuations of API and bulk drug manufacturers such as Laurus Labs, Granules and Neuland Labs improved significantly, post-Covid. China +1 and import substitution were cited as the key themes for the sharp re-rating in stocks in these segments.

MF shareholding in these companies, however, does not reflect such optimism, with holdings for the group hovering around 0.8-2.6 per cent by September 2021. In contrast, the average MF holdings in large-cap pharma and Indian pharma stocks stood at 10 per cent and 8 per cent, respectively.

MF shareholdings in Granules and Shilpa Medicare, which was negligible in March-end 2020, increased only to around 2 per cent each by September 2021. Laurus, Neuland and Aarti Drugs saw holdings decline by 1.2-2.1 per cent range in the period.

Focus on essential service

Similarly, research and API development companies, including Divi’s Lab, Syngene, Jubilant Pharmova, and Dishman Carbogen, have been seeing strong business trends in the last few years, uninterrupted by Covid.

But MF shareholding in these companies shrank by 1.1-6.6 per cent from March 2020 to September 2021, fuelled by the sharply increasing valuations from Covid lows. Unfazed by the loss of regular treatment volumes, focus on the ‘essential service’ nature of the hospital industry saw MF shareholding in this segment spike in the three months from December 2019 to March 2020 as the pandemic unfolded.

The shareholding further rose from March 2020 to September 2021 for Narayana Hrudayalaya, Fortis, Aster DM and Kovai Medical by 1.7-7.3 per cent. MFs may be betting on a higher healthcare penetration post the pandemic along with increased insurance cover to be able to pay for the facilities and treatment provided.

Hospitals, mostly a mature segment, trade at 15-20 times the one-year forward EV/EBITDA compared to diagnostic labs (organised diagnostic chains are relatively nascent) which trade at 40 times on the same metric. The valuation difference could be one of the reasons for MFs booking profits in diagnostic chains, even as the end market characteristics are similar across the segments.

Of the three listed players, Dr Lal Path labs and Thyrocare Technologies saw their MF shareholdings halve to around 4 per cent by September 2021 from March 2020.

Holdings in Metropolis Healthcare, which saw an increase post-Covid (from 6 per cent in March 2020 to 12 per cent in June 2020) came down to 9 per cent by September 2021. Valuations moving up from 26 times the one-forward EV/EBITDA in April 21 to 36 times recently may have again, tempered institutional investor interest in Metropolis Healthcare.

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