How to diversify in Pharma Sector


(Amit Jain) #1

Hi friends… I wish to ask a question.

I wish to invest in Pharma Sector. I have listed good companies that are great in the long run, 5+ years. However, I cannot possibly invest in all of these.

My question is, out of the following:

To properly diversify, which five companies must I choose?

Sun
Lupin
Glenmark
Reddy
Aurobindo
Cadilla
Gsk
Biocon
Cipla
Ajanta
Torrent

Thank You.


(Ashish) #2

It is a difficult to understand business to me. My approach would be to buy a pharma sector MF… SBI, UTI and Reliance have Pharma funds. For better returns go for Direct option.


(Amit Jain) #3

I looked up SBI pharma Fund. It has allocated 10% in Cipla. That is a mistake as Cipla is a very slow mover. I am willing to bet on the fact that Ajanta, Sunpharma, Lupin, Divis, Glenmark, Reddy will outperform Cipla.

Would it be wise to make a list of companies that I deem good, and invest individually in them, just like I would invest in a Fund? Would the challenges be any different? I wish to invest only 20% in Pharma sector. Hold rest of the funds, if and when other stocks correct.

My primary goal is capital protection, hence I will invest in established companies that are going through a correction, with a 5 year perspective.


(naravi2011) #4

Sir, The NAV of Regular Plan is lesser than the NAV of Direct Plan (Eg: SBI Pharma Fund). How we benefit by opting Direct Plan.


([email protected]) #5

The difference in nav is because the expense ratio in direct plan is lower then the regular plan


(rkothuri) #6

I don’t see Natco, Granules, Alembic, Caplin etc… In the list. Are you looking for only large caps? Is it good to accumulate large caps or mid/small caps in this correction?


(Amit Jain) #7

I suppose, mid caps would give quicker returns. Cadilla, Glaxo, Granules, Alembic and several more mid caps would qualify too. But, yes main focus is Large Caps as they provide comfort of predictability.


(Ashish) #8

Both funds did start with same base NAV of Rs. 10, so today NAV of direct
fund is higher due to higher returns only. This is possible as expense
ratio of direct fund is lower than regular fund. In regular fund brokerage
is paid out to brokers and hence higher expense and lower returns. Direct
funds are bought directly from fund house without any broker.


(Ashish) #9

Also check UTI Pharma and Healthcare fund. This has better portfolio allocation.


(ASPN) #10

A few thoughts -

  1. In investment parlance, Diversification means allocating your investments in different asset classes like Direct Equity, Mutual Funds (both equity & debt), Bank FDs/PPF/Post office schemes, Gold (physical/ETF) etc etc. So the question itself is questionable :slight_smile:

  2. Still, if you happen to be extremely positive on Pharma sector and want different flavors within this sector, I would suggest you to think on below broad ways-

a) Mid Cap vs Large Cap - understandably, the mid caps will grow faster and provide better returns in the longer term than the large caps

b) Pharma Exporters - Stocks like Granules, Shilpa export most of its products to western markets and are prone to inspections from various regulators like EMA, USFDA etc. Depending on the outcome of inspections from different regulators, the businesses may take wild swings.

c) Mix of Domestic & Export focus - Most of the Indian pharma players nowadays are focused on exports to the USA and has got big big expansion plans. Biggies like Sun Pharma, Lupin, Cipla and even mid caps like Alembic, Glenmark, Alkem etc have their legs firmly rooted in domestic markets as well as good exposure in exports. So its kind of mix or best of both the worlds.

d) Domestic oriented companies - Something like Eris Lifesciences which is completely focused on Indian market can be considered.

e) Indian subsidiaries of Pharma MNCs - There are some listed subsidiaries of Pharma MNCs like Pfizer, Merc, Sanofi etc. These have got specialization in one or more therapeutic areas owing to its strong parentage. But the presence of its parent in another countries (or lets say across the world) makes them confined to the Indian market only.

So, apart from Pharma, suggest you to consider investing in other diverse sectors as well…Happy investing !


(Sameer Wakude) #11

Hi,
I would choose based on the underlying business. My top 5 bets are:
Aurobindo: Strong US business
Biocon: Bet on Biosimiars
Alkem: Domestic growth/Brands
Sun: Biggest Indian Pharma, great at acquiring and making them profitable.
Natco: Master in complex formulations (e.g. Hep-C generic)


(Amit Jain) #12

Sameer bhai, thanks for your response. This is diversification in true sense.

Furthermore, there are a few other companies namely:

Granules
Lupin
Ajanta Pharma
Cadilla
Cipla
Torrent
Reddy

Of the categories you hve mentioned, in which would you place these above companies?


(Sameer Wakude) #13

Hi Amit,

There are many companies in Pharma space. We need not buy all. Just choose the best company in each theme. Also, I would suggest investing in other sectors like auto, auto ancillaries, Banking, NBFC, IT, FMCG etc. not to put all eggs in one basket.

My views for the companies:
Granules: I will put in API category. They are trying the same route as that of Aurobindo, API to formulations. Red flag: Too much pledging by promoters. Screener says: Promoters have pledged 78.07% of their holdings.

Lupin , Lupin, Cadila, Fantastic company. But I have aurobindo which is cheaper and growing faster, has bigger ANDA pipeline.

Torrent: has majority revenue coming from non US countries. So it will give you more diversification.

Reddy: Revenue and Profits both shrinking. I would stay away.

Piramal: You could look at Piramal for a diversification play. They have non-pharma business too under the same company.

Please note this are my personal views and interpretations. I suggest you read Annual Reports and investor presentations of all the companies. It will give you more ideas. Add your findings to this thread so others benefit from it too. e.g. Copaxone is a 2200 million USD opportunity as per Lupin investor presentation. Now if you search you will find Natco is making generic for it. Lupin investor presentation says Renvela is 1830 million opportunity and if you search Aurobindo has got a generic version approval. Advair Diskus is a 4400 million opportunity which Lupin is working on.


(Amit Jain) #14

You are right regarding Dr.Reddy. PE 31 is too expensive given the current state of affairs.

Would it be a good idea to just compare the list of pharma companies based on their PEs and PEG. Once short listed that way, we could further oust companies with poor managements practices.

For ex.
Aurobindo has an excellent PEG of 0.30, with good management.
Granules too has a good PEG 0.44, but pledging is an issue.
Dr.Reddy has a negative PEG
Ajanta PEG 0.46, which is great.

Please advise


(Sameer Wakude) #15

Hi,

2 aspects need to be considered while deciding the company:

  • Present valuation (PE, PEG, EPS growth, Debt/equity, Price/Sales, Price/Cashflow etc)
  • Future growth prospects

For future growth prospects, read ARs and Investor presentations. Compare their attributes like ANDA filing, Biosimilar development, Size of opportunity, etc and then take a call. This is I believe more important than the valuation. (I would say: 30% present valuations and 70% future prospects).

This will help you build the conviction level.

Disc: Invested in Aurobindo.


(shrikini) #16

Any opinion on Glenmark and Divi’s Labs ?


(Sameer Wakude) #17

Both are excellent pics. Both had fallen because of FDA action.
Divis focus on APIs , most of their business comes from this space.
Glenmark is currently spending huge money on R&D.

I would buy on dips.

Glenmark is available at a great valuation. But you never know how much it can fall from here. Remember market is always right. It had fallen to 3 year low recently.


(Dhiren Shukla) #18

I did sip in SBI pharma. Sip is not doing good as trump got elected in USA and tightening the rules day by day.I would suggest you to choose different shares from different sectors. One shouldn’t put all his eggs in same basket.