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Equity funds focused on the healthcare segment, primarily pharmaceuticals, hospitals and diagnostics, are in the midst of a rally, driven by the ongoing Covid pandemic.
Over the last ten years, Indian healthcare funds underwent periods of high growth followed by moderation and are now again on the growth path. While a large number of healthcare funds have been started in the last three years, three funds, managed by UTI, SBI and Nippon, have weathered the industry’s cyclicality through the last 17-22 years and offer time-tested performance.
While SBI Healthcare Opportunities Fund did well in a phase when Indian companies were fuelled by patent cliffs, Nippon India Pharma Fund consolidated the gains in the following period of industry-wide losses. UTI Healthcare Fund delivered an average return during the highs and lows, but may be better poised for a downside eventuality from here on.
Patent cliffs, consolidation
The early part of the last decade was marked by patent cliff (patent expiries of billion-dollar products in the US) and Indian pharma companies’ unrestricted access to the $150-billion market. SBI Healthcare Opportunities Fund outperformed the segment from June 2011 to January 2016 with a CAGR of 27 per cent compared to others’ range of 20-24 per cent. Its top holdings in the period focussed on companies with US potential and avoided stocks with emerging market focus or even MNC companies. The SBI fund held outsized holdings of Sun Pharmaceuticals, sometimes accounting for 24 per cent allocation.
Later, as competition increased in US markets, pricing declined significantly. The period from 2016 to mid-2020 was unusual, as MNC firms with Indian focus performed better than Indian companies with multinational focus.
Nippon India Pharma limited its losses in the period, by primarily investing in MNCs and companies scaling their US portfolio, such as Cipla, Dr. Reddy’s, Aurobindo Pharma and also Biocon, building its biosimilar portfolio. The Nippon fund witnessed flat growth from January 2016 to June 2019 (-1 per cent CAGR), compared to the index (-7.5 per cent), UTI (-5.2 per cent) and SBI funds, which reversed gains from the earlier period, declining by 14 per cent CAGR.
The benchmark BSE Healthcare Index and the three funds returned a CAGR of 50 per cent and 58 per cent respectively from June 2019, with Nippon India Pharma Fund marginally outperforming the group and sustaining its leading performance in the last six years.
Portfolio holdings
As per latest holdings, the three funds have assigned highest weight to Dr. Reddy’s stock, which may be attributed to its comparatively weaker participation in the most recent rally. On the other hand, the three funds still hold good positions in Divi’s Laboratories which has had a strong re-rating in the last one year.
Post-Covid, the Q1-FY22 results announced for some pharma companies, including Dr. Reddy’s, have mentioned price erosion at a higher level in North America. This is eerily similar to the consolidation witnessed from mid-2016 after rapid growth from 2010. This time around, UTI Healthcare Fund seems better positioned for any such eventuality with higher exposure to Indian hospitals, pure-play API and Indian formulations in its top ten holdings. The UTI fund is equally inward-focussed.
The Nippon fund is outward-focussed with lower importance to MNCs and higher preference for large domestic companies pursuing their specific niches in export markets along biosimilars, respiratory, and other specialty products. Even as SBI Healthcare Opportunities is a mix of the two directions, it is interesting to note the 3.3 per cent in cash equivalents it holds, figuring in its top ten positions.
The three funds hold 24-29 stocks. SBI fund holds 50 per cent in large-cap stocks while the UTI and Nippon funds hold 65 and 70 per cent, respectively, allocating the remainder between mid and small-cap stocks. As smaller companies from APIs, diagnostics and niche operations expand market size, the SBI fund seems better diversified for such possibility. Investors with a long term view may enter the segment on dips, for instance in the current period.
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