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Dream 11

Editor’s note: The Indian pharmaceutical industry is witnessing a structural bull run underpinned by several growth triggers, including favourable demographics, under-penetration of healthcare services in India, innovation and export opportunities. On this backdrop, we decided to review India’s largest pharma sector fund—Nippon India Pharma Fund. We also touched base with Sailesh Raj Bhan—Deputy CIO, Equity, Nippon Life India Mutual Fund—who’s been managing the fund since its inception in May 2004.

In this note, we are sharing our findings with you. Hope you will find them helpful for your analysis.

First off, why is the Indian pharma sector enjoying the limelight at the moment?

The Indian pharma industry has grown multifold over the last two decades and now stands at an inflection point. Over these years, many leading pharma companies have attained size, scale of operation, financial muscle and technical expertise to compete on the global level. Technological disruptions and innovations in the sector are likely to further accelerate the pace of the sector’s growth in India as well as in the global markets.

Here’s why you can’t ignore the pharma sector at this juncture...

At present, India’s per capita healthcare expenditure is just 7% of the global average. Post pandemic, healthcare spends across the world, including those in India, are expected to rise—thanks to growing awareness amongst people and governments. Moreover, India is likely to progress from a USD 2,000 per capita income country to a USD 4,000 per capita income country over the next few years. Hence, it appears that the sector may see a resounding growth trend in the next 10-15 years.

How has the historical performance of Nippon India Pharma Fund been?

The historical performance of Nippon India Pharma Fund has been satisfactory as the fund has outpaced broader markets, across timeframes and market phases, barring a few blips in the recent years.

Nippon India Pharma Fund was launched 16 years ago. Being the largest pharma sector fund, it now manages an AUM of (Assets Under Management) of Rs 5,238 crore, as on May 31, 2021, as per the disclosures made by the fund house.

Interestingly, the Indian pharma industry has grown at a CAGR of 10% since the launch of Nippon India Pharma Fund in 2004, whereas the since inception return of Nippon India Pharma Fund has been 22%. In other words, while the pharma sector grew 5X, the Net Asset Value (NAV) of the fund grew over 30X—from the NFO price of Rs 10 to Rs 309.9 as on July 02, 2021.

You see, an actively managed sector fund can be rewarding if it’s managed intelligently and with great caution.

Portfolio positioning of Nippon India Pharma Fund

At present, the fund holds a top-heavy portfolio wherein top 5 stocks account for 45% of the portfolio. Nippon India Pharma Fund holds 80%-85% exposure to pharma companies while the healthcare service providers such as hospitals and diagnostic companies make up the rest of the portfolio. The fund is market cap agnostic; but as we understand from Sailesh, the fund pays more attention to the capabilities of a company (rather than its market cap) before including it in the portfolio.   

Historically, the fund has been agile in spotting industry and stock market trends. For instance, when the going got tougher for the US focused generic drug companies, about 5 years ago, the fund trimmed its exposure to the US-centric companies. Moreover, it realigned its portfolio to capture more domestic plays which looked promising that time.

Nippon India Pharma Fund has demonstrated discipline in managing stock weightages and hasn’t hesitated to book profits or add positions aggressively when the management team felt appropriate.  

What is the view of the fund manager on future opportunities?

Sailesh offered his perspective on the future of the pharma sector without using any jargon. To begin with, he identified various sub categories that his fund has been focusing on which include:

  • Domestic pharma market
  • Emerging markets
  • US generics
  • US specialty formulations
  • Active Pharmaceutical Ingredients (API) and CRAMS (Contract Research and Manufacturing Services)

As per Sailesh’s assessment, except for US generics, which is an intensely competitive market, all other categories mentioned previously are likely to grow in double-digits (12%-15%) for a considerably long time (say 10-15 years).

Just to give us an idea about the quantum of opportunity, he drew our attention to India’s ageing population.

Although India is popularly termed as the world’s youngest nation, it also has the 4th largest population above 50. It’s been observed that the healthcare spends by the 50-plus population are 5-10 times more than the average per capita spends on medicines and healthcare services. Indian pharma companies derive nearly 50% of their revenues, on an average, serving the Indian population.

Rising incomes and growing awareness about healthcare is expected to result in early diagnosis of chronic diseases and better management of ailments. This may create a pull factor for medicines and delivery of healthcare.       

Giving another example, Sailesh highlighted that at present majority of Indian companies doing business in the US market are serving the USD 100-billion generics market. However, a few of them are increasingly assessing opportunities in the speciality products market, which is six times bigger.

According to Sailesh, 3-4 Indian companies might witness a staggering growth of specialty revenue over the next 7-10 years. Just to give us the sense of the opportunity, he reckoned one successful product in the specialty segment can potentially fetch the annual revenue of Rs 5,000 crore to 7,000 crore, which sounds ecstatic.

The pharmaceutical sector has just a 5.2% exposure in Nifty 200 at present. According to Sailesh this might climb to a double-digit mark over the medium term.

To sum up

Nippon India Pharma Fund appears well-positioned to take advantage of the under penetration of pharmaceuticals and healthcare services in India and other emerging markets. The fund’s penchant for companies catering to specialty businesses in the developed markets might prove handsomely rewarding in the long run. That said, a sector fund is always a high-risk high return play.

You may also like to read: What’s your excuse for not investing in global equity markets?



The blog is for information purposes only and it’s purely based on the interpretation of our conversation with Sailesh Raj Bhan of Nippon Life Mutual Fund. Anything mentioned herein should neither be construed as financial/investment advice nor should it form part of any view/recommendation(s) given by Ventura.

Under no circumstances should the contents of this blog should be treated as Ventura Securities’ market/sector view. The only purpose of this coverage is to create awareness amongst investors and help them take well-informed decisions. Asset allocation is an extremely important decision. We strongly suggest you to consult your financial advisor before taking any decision pertaining to your finances.

Investing in mutual funds is subject to market risks, please read the scheme information documents carefully before investing.

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