Kotak Mutual Fund has launched a new healthcare fund, and the NFO is open till December 4. The pharma/healthcare sector now has around 20 funds from not more than five funds before 2020. Covid has improved sector focus and expanded the cluster’s definition. Compared to earlier pharma funds, the entire healthcare continuum is now the preferred bet, including pharma, hospitals and diagnostics.
The fund will invest across the sector; pharma (domestic, generic, CDMO, speciality and API), Hospitals, diagnostics and medical equipment. The fund aims to leverage the growing potential of healthcare-allied companies. With an established base of operations catering to low-cost markets, the fund aims to ride the sector as it develops into a mature industry offering specialized services and products. The increasing impact of lifestyle diseases, growing affordability of middle class and increasingly older demographics are expected to support the sector outlook. The fund launch also points to a sector multiple (Nifty Healthcare) trading closer to its long-term average (34 times trailing EPS) as a positive factor.
Sectoral bets are risky by definition, but healthcare funds are expected to be defensive - lower dips in earnings as the services/products are essential. While expectations from defensive segments are different for everyone, it must be noted that in CY-2022, none of the 14 funds in pharma/healthcare generated a positive return compared to Nifty-50’s 4 per cent returns .
The longer-term prospects of the two leading asset segments in the sector, pharma and hospitals, are looking sanguine currently.
With Indian pharma expected to grow at low double digits for the next decade, domestic pharma has a strong domestic base. The Pharma segment is also riding high in US markets, which is not a headwind for now. Not only has price erosion scaled back to single digits, but shortages in supplies and high-value launches also supports margin revival. Indian demand, while continuing to be strong, must overcome NLEM pricing restrictions in the current year.
With a rising middle class and lower availability of universal healthcare, Hospitals are in for long-term earnings growth. Volume growth through the addition of hospitals and pricing growth are two levers of growth that the participants are fully utilise. Over five IPOs in the last two years have also expanded the available stock universe.
The three listed diagnostics are a different route to the same end market. Diagnostic chains have expanded rapidly in the early phase of their growth owing to unorganized to organized shifts. This has been at the cost of pricing, which is beginning to reverse for organized players.
Exposure to the healthcare segment will be a judicious diversification in any long-term equity portfolio despite the higher risk from sector allotment. The sector should gain from rising per capita income, and the sector also has a higher form of pricing power, which evident in pharma and hospitals. The essential nature of demand also differentiates the sector.
For fund exposure, investors can wait and watch portfolio returns from Kotak Healthcare before subscribing. Our MF ratings rate another thematic fund from Kotak (Infra & Economic Reform) with three stars. Within healthcare, there are three funds with more than ten years of operations from which we have earlier recommended subscribing to Nippon India Pharma for pharma exposure.