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Why healthcare stocks are what the doctor ordered

| | Updated on: Jan 08, 2016
pharma

pharma

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Recent healthcare entrants set for a good ride in the stock market this year

A pathological lab, a pure play pharmaceutical company and a hospital — all three raised money from the market last year, and successfully.

That may not come as a complete surprise to market-watchers, as pharmaceuticals and healthcare have always been consistent performers in the market, less prone to wild swings in fortune. And for new entrants in the market — Narayana Hrudayalaya, Alkem Laboratories and Dr Lal PathLabs — calendar 2016 will be no different.

In fact, the use of “defensive” to define the pharmaceutical and healthcare sectors is more of a euphemism for consistent growth, quips a market-insider. And here’s why.

Rangachari Muralikrishnan, Partner of research firm Kurtosis Analytics explains: “The BSE Healthcare index has returned 443 per cent in the last 10 years — that is, an investment of ₹100 yielded would have become ₹543 after 10 years whereas other sectors have not done as good. In fact, the sector has a vibrant domestic market and a strong export market, it is not known why it is called a defensive bet,” he says.

Reasonably valued

So, why is it that the recent pharma and healthcare initial public offerings (IPOs) have had a good showing (they have been fully subscribed) despite market conditions? (see table).

“Simply because the valuations at which these IPOs such as Dr Lal PathLabs, Alkem, Narayana Hrudayalaya were offered was realistic, the response was huge,” says Arun Kejriwal, Founder, KRIS Research. In fact, the Syngene IPO set the tone, he adds.

Pharma and healthcare are evergreen sectors, says a boutique investment banker specialising in pharma mergers and acquisitions. “The reason why pharma and healthcare has grown so much is manifold. First, no one negotiates fees with doctors, their medical bills with a hospital or a pathological lab. Discounts are never sought at a medical store and people usually abide by what is prescribed.”

Besides, he adds, sedentary way of urban life and the continuous use of technology lead to several complications and lifestyle diseases. Diseases once seen in 60-year-olds such as diabetes and heart ailments are now common in 30-somethings, he says. And add to that, stress and climate change-related diseases.

Better drugs and advancement in medical technology have further increased life span and all these have cumulatively doubled the addressable market for pharma and healthcare providers, the banker observes.

Outlining why the sector is a “preferred choice”, the banker explains, “Look at the net profit margins (net profit as a percentage of net sales) of India’s top pharma companies. They are more than double of most other manufacturing sector companies. And this, would only go up with the increase in exclusive marketing rights for several drugs in the US, which Indian companies are bagging. Which investor would not want to park his money in companies which return about 15 per cent in terms of net profit margins?”

Published on January 19, 2018

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