Pharmaceutical sector - Bullish times ahead?

The Pharmaceutical sector stocks in India have rallied sharply in the last 1-1.5 months. On the charts, the sector is gearing up to give a breakout after a multi-year consolidation. If the breakout is confirmed then the Indian pharma stocks could be decent wealth creators in the coming years.

Indian Pharma stocks are on the verge of a breakout

After a 700% run in 7 years from ~ 2000 to ~ 14,000 the pharma index has been consolidating. The index had corrected to ~ 6000 levels, down nearly 55% from its peak in 4 years. The interesting point is that the Pharma sector till 2015 was seen as a defensive sector to invest in. However, few sectoral headwinds hit the fundamentals of the pharma companies in India. Some of these headwinds were:

• Falling prices of generics in USA
• Rising cost of API imports from China
• FDA notices to manufacturing units in India

However, the COVID-19 situation has renewed investor interest in the pharma sector once again. The pharma index is up by ~ 50% in the last 1.5 months alone. Investors should note that in mid 2018, the pharma index had rallied 35% but fell back again. If the pharma index sustains above 9,500 on a weekly basis or closes above 10,000 then the breakout will be confirmed on charts.

How to play the Pharma theme as a retail investor?

Investing in good pharma funds is the best way a retail investor can play the pharma theme. We would recommend investing in more than one fund to diversify. Most of the Pharma funds in India were setup in the last 1-2 years thus don't have a comparable track record yet. The pharma funds list is as given below.

List of Pharma funds in India - Direct plans

We would recommend investors to select 2-3 good funds from the list and invest with a horizon of 1 to 3 years. While selecting the right funds to invest in, the expense ratio should not be ignored. The funds that we like from the above list are Mirae Asset Healthcare fund, Nippon India pharma fund, IDBI Healthcare fund and DSP Healthcare fund.

Best Pharma stocks in India?

The pharma sector stocks in India are often misunderstood by investors. The business model is not as simple as "medicines will always be consumed" hence pharma is a long term buy and forget. This is one of the toughest sector for any retail investor to understand and it would require months of reading industry reports, annual reports, etc to get a grip on the sector. Investors can either choose to buy the pharma stocks with good momentum in stock price or leave the job to the experts. A list of pharma stocks in India held by the top performing pharma sector funds is given below.

Top 15 Pharma stocks held by MFs

The above list has been created by taking the average holdings of the top 4 pharma funds. Investors can cherry pick the stocks they intend to study and make an informed investment after studying the stocks accordingly. The fund managers can change allocation at their will and stocks with 2% to 3% allocation now can see higher allocation in the future if the business model and performance of the company is good.