Hi …
I have been holding FMCG stocks for about 7-8 yrs now. Things were steady till Mar 20 when the pandemic hit us. Till then, I used to maintain an FMCG wt of roughly 35-45 pc in the portfolio. During the pandemic, I increased to 100 pc ( momentarily…by exiting all other stocks and loading up on FMCG only )
Post …May/June 20, I started studying the Pharma stocks again ( I used to own them in 2012 - 2013 but slowly lost track and concentrated more on FMCG )
Over the last 6-9 months, I have studied the ARs and concalls of many pharma companies like - Sun, Cipla, Cadila, Alembic, Alkem,Ajanta, Laurus, Divis, Dr Reddy, Aarti Drugs, Divis etc.
I also made a basket of these stocks ( practically buying all of them with 1-3 pc kind of portfolio wts ). Did this by bringing back the FMCG wt to below 50 pc. As the economy was opening up, also bought some economy facing stocks like Bajaj Finserv, HDFC Bank, Kotak Bank, HDFC AMC, Pidilitte, Asian Paints etc
I tried my best to learn as much as I could by reading, asking questions and by following various webinars / portfolio threads of ppl like - Hitesh Patel and other respected members who are invested into Pharma Sector.
Key learnings ( as I understand ) -
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Generic pharma companies ( specially in oral solids and to a lesser extent in Injectables ) have shallow entry barriers. Their India business is far more profitable as India is a branded generic mkt. In regulated mkts…they end up competing on price and various short term demand / supply mismatches in US/EU mkts. Price erosion is a constant overhang…its like running on a tread mill …u have to keep running ( launching new molecules ) just to stay at the same place. In my mind…thats a gruesome business because of hyper competition and little / no product differentiation. In my mind, their golden age is over. Its a cyclical story now…undergoing an up cycle at the moment due easing up of competition in US. That may last another 2-3 yrs.
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Making APIs is a little more difficult as u have to set up physical infra for each and every molecule. There are aprox 4000 molecules ( drugs ) in the mkt today . A typical API company ( mid sized ) generally makes 20-40 APIs at a time. On the other hand, a typical formulator is making… say over a hundred formulations at a time. Its less infra and more compliance driven. In APIs, physical infra is a natural entry barrier.
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The China +1 model, environmental issues in China and the related costs are for real now. Indian API industry has strong tail winds. Even stronger tail winds are in the CDMO sector. ( one must listen to the webinar by Mr Sajal Kapoor on CDMO sector delivered - mid last yr. Its avlb on Indian Investors Conclave )
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In the face of China following the laid down environmental laws, Indian labour being cheaper, good chemistry skills in India…what can stop India from being an API power house ??? China following environmental laws led to a huge bull mkt in Indian spl chem sector. Why will that not happen in API sector ??? I think…its kind of a very high probability event.
Current Portfolio Status -
Exited Sun, Cipla, Dr Reddy, Ajanta, Alkem, Alembic …after making descent gains in all.
Holding onto - Laurus, Aarti Drugs, Divis, Syngene. ( shall keep holding on )
New additions over the last 1-2 months ( that I intend to hold for a long time …say more than 5 yrs ) -
Jubilant Pharmova ( radio pharma + CDMO )
Jubilant Ingrevia ( speciality chemicals )
Neuland ( API + CDMO )
Solara ( API )
Cadila ( vaccines + generics + consumer business )
Now - I intend to take my Pharma portfolio wt to around 30-35 pc. Therefore will keep adding onto these names on dips.
Regards,
Ranvir Dehal
