Mutual Funds

Should you invest in Aditya Birla Sun Life Nifty Healthcare ETF?

Sai Prabhakar Yadavalli BL Research Bureau | Updated on October 16, 2021

The ETF invests in companies in high growth segment at marginally premium valuation

To ride on the growth opportunities presented by the Indian pharma industry and the rising share of healthcare services in the GDP, Aditya Birla Sun Life AMC is launching an open-ended exchange traded fund (ETF) tracking the Nifty Healthcare TRI (Total Return Index). The ETF is open for subscription from October 8 to 28, 2021.

Index composition

The Nifty Healthcare index comprises 20 stocks from the pharma/healthcare space according to their free float market capitalisation. Nifty Healthcare caps any one stock’s weight to 33 per cent and the top three holdings to 62 per cent, to avoid concentration. However, it does not have a pre-set sector cap, resulting in the index holding 87 per cent in Pharma stocks, 11 per cent in Hospitals and 2 per cent in Diagnostics labs currently.

Within the Pharma cluster, the current allocation is geared towards Sun Pharma (18 per cent allocation as on September 30), Divis Labs (12 per cent) and Dr. Reddy (12 per cent) which constitute the top three. Apollo Hospitals (9 per cent), Metropolis (1 per cent) and Dr. Lal Path Labs (2 per cent) make up the broader healthcare segment stocks.

In contrast to the healthcare index, the Nifty Pharma index, constitutes ten top Indian Pharma companies by market capitalisation (free float). Nifty’s healthcare index returned 7.42 per cent in the last five years compared to 4.77 per cent of the Nifty Pharma index. On a broader comparison with Nifty 50, Nifty Healthcare outperformed Nifty 50 from 2010 to 2016 and reverted to mean by early 2020. Post the pandemic, the recovery has been sharper with Nifty Healthcare compared to Nifty 50 (see graph).

Sector outlook and valuations

On the valuation front, the pharma stocks have re-rated in the last one year and are trading at a PE range of 25-30 times one year forward earnings from 18-20 times till FY19-20.

The renewed optimism in the sector is based on the product lines added in the pandemic period, developing value added portfolio to combat US generics pricing pressure, and defensive play associated with Pharmaceuticals. Investors must take note of the overhang of US-FDA inspections, from which the stocks were shielded over the last year on account of Covid prioritization.

The re-rated valuations still compare within range to the sectors historical average of 25 times forward earnings, implying scope for growth in the sector, in spite of pharma rally of the last year.

Hospitals and Diagnostics companies, which form 13 per cent of the index, have always traded at high valuations (40-50 times one year forward earnings). The pandemic which brought the focus of policymakers on the under penetrated healthcare services industry, has further increased the valuations. Apollo Hospitals and Dr. Lal Path labs are now trading at an average 70 times one year forward earnings. The earnings growth may most likely end up failing high valuations in hospitals and diagnostics in the short-term.

Overall the index and hence the ETF, is investing in a high growth segment at a marginally premium valuation levels. The healthcare industry can gain from increasing penetration in the country, driving further growth.

Investors must note that this is not the only option to bet on the pharma /healthcare space.

Other options

There are three other ETFs based on the Nifty Healthcare/Pharma index all of which have been launched in the last one year. The three funds offer expense ratios in the range of 0.15 to 0.22 per cent. The expense ratio for ABSL ETF is currently unavailable.Axis & ICICI Pru Healthcare ETFs and Nippon Pharma ETF have net assets of Rs. 20, 54 and 117 crore respectively. As with any ETFs, trading volumes will need to be closely watched before investing.

Under active management, 9 Pharma/healthcare funds whose expense ratios (regular plans) are in the range of 1.9 - 2.5 per cent are available. These funds have returned in a range of 33 per cent (Mirae Asset Healthcare) to 25 per cent (IDBI Healthcare), compared to 22 per cent return for Nifty Pharma and 28 per cent return for Nifty Healthcare in the last one year.

Published on October 16, 2021

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