Meet the fund manager: Kotak's pharma fund shines among PMS schemes in April

In line with our overall investment philosophy, we have bias towards selecting companies that are likely to surprise on earnings growth, have strong balance sheets and are currently mispriced by markets.

We avoided companies having strained balance sheets (whether heavy on debt or working capital) and companies facing ROCE contraction, through either margin compression or under-utilization of facilities. A combination of these factors allowed the portfolio to deliver healthy returns.

Q) Healthcare stocks are resurfacing after almost 4 year of the bear cycle – do you think the strength is likely to continue?

A) Yes, Pharmaceutical stocks have begun to outperform after a long-bear cycle. Beyond the period of some business disruption from the ongoing lockdown, we believe fundamentals of Pharma companies, in general, are likely to remain exceptionally strong due to: a) India pharma emerging as a large beneficiary of likely shift in the global supply chain from China; b) double-digit pharma demand in domestic markets; and c) the opportunity to accelerate market share given strong R&D capabilities and large global capacities.

Post-COVID, we anticipate much greater interest in Healthcare and Pharma. The world has paid a heavy cost by leaning on the side of frugality rather than conservatism, regarding investments in Healthcare.

We expect the wheel to turn a full circle and investments to rise in the Healthcare space going forward. Pharma and Healthcare companies will benefit as a result. India has a global scale and capabilities in this sector and is likely to attract interest from investors in the coming future.

Q) Pharma stocks have rallied in double-digits in the last 2 months – do you think there is more upside left?

A) The Pharma stocks have outperformed over the last 2months. Our analysis suggests India Pharma sector has a cost-competitive advantage globally with R&D expertise, which provides robust earnings growth potential over the next 2-3 years.

This apart, the sector is still relatively under-owned by institutional investors; which we think could drive further upside for Pharma stocks and provide an attractive risk-adjusted return.

At its peak, the Pharma sector constituted 13-14 percent of the frontline indices. This weightage came down to 4-5 percent.

If this weightage reverts to past levels, upsides can be material. We see a good probability of the Pharma sector emerging as a leader in the next bull phase of stock markets.

Q) From a portfolio diversification perspective - what percentage of the portfolio should one have in their portfolio looking from a perspective that healthcare would be a big talking point in coming Budget not just for India but across the world?

A) We believe the absolute weightage/holding in Pharma stocks in a portfolio would depend on the risk appetite of the investor. In our understanding, with Pharma’s sector strong fundamental outlook and relatively under ownership, we think an overweight position on Pharma (vs Nifty Index weights of 3-4%) would be appropriate for most investors.

Some of this overweight position can be structured by investors directly through investments in Pharma & Healthcare Fund, since benchmarked funds may find it difficult to materially deviate from Benchmark Pharma weights.

Alternatively, investors willing to take long-term concentrated sectoral investments could look at investments in our Pharma & Healthcare thematic portfolio with a 3-5 year investment horizon.

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