Reliance Pharma Fund: Invest. Pharma outlook is booster

Pharma and healthcare companies have been able to deliver good profit growth even as other sectors have struggled. This has led to a 24 per cent gain in the BSE healthcare index in the last one year. With growth challenges unlikely to abate soon, pharma may continue to outperform the broad market.

Investors may consider buying units of Reliance Pharma fund to benefit from the upside in the pharma space. Stocks in the fund’s portfolio currently trade at a weighted average price earnings multiple of 11.6 times trailing earnings. The recent correction in midcap stocks may be a good opportunity for long-term investors to buy these stocks.

In addition to healthy growth in the home market, Indian companies exporting to developed markets such as the US and Europe have also benefited from the patent expiries for large products in these markets. A weak rupee also bolstered growth for pharma companies.

Though an adverse pricing policy may be the near term risk to pharma earnings, higher volumes can partly mitigate the negative impact of price cuts.

Favours mid-caps

Contrary to the index, which sports predominantly large-cap stocks, Reliance Pharma Fund has a marked mid-cap slant. The portfolio includes stocks such as contract manufacturing major Divi’s Labs and innovative research company Sun Pharma Advanced Research, in addition to formulation players. This may curtail the downside risk in the event of an unfavourable drug pricing policy.

The fund has managed to outperform the benchmark by an impressive margin on a five-year basis.

Over the last five years, the fund almost trebled its NAV (net asset value). But it lagged its benchmark returns on a one- and three-year basis. Lower exposure to stocks such as Sun Pharma, Glenmark and Lupin led to a marginal underperformance on its one-year showing. However, the performance gap has narrowed down in the last five months.

In the past, the fund managed to arrest slide in a downturn. For instance, during December 2010-2011, even as the benchmark lost almost 12.8 per cent, the fund managed to limit losses at 11 per cent.

Similarly, in a recovery phase too, the fund managed to rake in gains higher than the benchmark. For instance, during the February 2009-November 2011 period, the fund trebled its NAV, compared with a two-time surge for the benchmark.

Higher exposure to stocks such as Sanofi Aventis, Torrent Pharma, Indoco Remedies and Aurobindo helped the outperformance despite the fund holding 6 per cent of the average assets in cash during this period.

The fund has the lowest portfolio concentration among peers. In a basket of 24 stocks, the top 10 stocks account for 76 per cent of the fund’s assets, compared with an average 82 per cent for the category. In addition to pharma, the fund also holds FMCG company Zydus Wellness (4.2 per cent) in its portfolio.

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