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The idea is to identify a business which is deploying the right strategy and preparing for the next growth way

BFSI Industry Interview

On: Jun 8, 2018 | Duration: 1.00 hrs | From: Advisorkhoj Team
BFSI Industry Interview in Advisorkhoj - The idea is to identify a business which is deploying the right strategy and preparing for the next growth way

Mr. Vrijesh Kasera has professional experience of more than 9 years and his primary responsibility includes Investment Analysis & Research. Prior to this assignment, he was associated with Axis Capital Ltd. as an Equity Research Analyst. He has also been associated with Edelweiss Broking Ltd.

The stock market has been fairly volatile this year. We in Advisorkhoj, always advise our readers to have a long term, time-frame for equity investments. At the same, our readers are also interested in knowing the short term outlook, so that they can better decide, whether to invest in lump sum, SIP or STP. For the benefit of our readers, please share with us your next 12 month outlook. Also please give us your 3 – 5 year outlook for Indian equities?

We are very optimistic on the Indian economy and believe that the next many years will see a sustained GDP growth. Equity market will reward investors in tandem with the GDP growth. I would advise the investors that investments (particularly in equity markets) should be done to achieve the long term financial goals. Any investment should be done with a mind-set of 5-10years to work compounding in their favour.

As far as the 12 month outlook is concerned, I think though the micros would be supportive with companies delivering earning growth, the macros (oil prices, currency and uncertainty on the upcoming elections) may create some volatility in the markets. Investors should not try to time the market based on short term volatility and should address the same through staggered investments (depending upon the need and the risk profile of the individual investor).

The Pharma sector was a favorite for investors 3 years back. However, this sector has been going through a bad phase for the last 3 years. For the benefit of our readers, please explain the reasons for this underperformance, especially from the perspective of export market, particularly the US, which accounts for a large percentage of revenue for this sector?

Pharma companies had high exposure 35-40% to the US generic markets. Over 2009-2014 companies benefited on account of slow pace of approvals from the USFDA and spate of products going off-patent. However, over the last 3 years on account of consolidation of the distribution channel along with GDUFA implementation by the USFDA led to increased regulatory actions on the non-compliant facilities (leading to delay in product launches for affected players) and increased pace of ANDA approvals (leading to increased competition). Both these effectively led to pricing pressure in the US generic market leading to lower margins and lower return on invested capital.

However, based on our interaction with the companies and industry experts, we believe we are near the bottom in terms of pricing pressure.

What impact will the US Administration’s plan to reduce drug prices will have on our generic drugs industry which is already under pricing pressures in that market?

The US administration plan to reduce drug prices in the US would aid the generic industry. When I say this, one should understand that the price debate is around the pricing of branded/patented drugs and the administration intends to introduce more generics in the market. This has proved to be an effective way for the US to reduce drug prices in the past and don’t think there is any deviation from the same.

Demonetization and GST caused disruptions in many industry sectors, including the domestic retail pharma sector in the past 12 to 18 months. Do you see long term benefits from these reforms for the pharma supply chain?

GST impacted the sector as the channel corrected inventory in the system initially as it adjusted to the new tax regime. However, the initial hiccups on account of the change in inventory cycle have normalized and the growth rates in the domestic market have returned to the normal levels.

Please give us your longer term outlook on the pharma and healthcare sector, both from earnings growth and valuation viewpoints. Why do you think, this sector will be attractive for investors in the medium to long term?

We believe that the last 3 years has taken out lot of froth from the system in terms of both earning expectations and valuations. If we go by the recent commentary from global pharma companies have indicated early signs of stabilization in the market, with players vacating the market which has become economically unviable. The investments on R&D are also been recalibrated and cost being monitored closely. We believe if one has a 4-5 year view the sector has the potential to generate good value for the investors.

What are some of the key challenges / risks, international (export) and domestic for the pharma and healthcare sector going forward?

Some of the risk factors are Global announcements and Regulatory changes. Exports sales would obviously be impacted by volatility in the currency.

Many investors view the pharma and healthcare sector as one and the same thing, but the pharma sector is really a sub-set of the overall healthcare sector. Please give us your perspective on different sub-sectors and businesses within the healthcare, as well as your outlook on these different businesses?

Healthcare is a broader theme, just to give you a perspective global healthcare is ~USD 7 trn market while pharma is just USD 1 trn market. Healthcare includes hospitals, diagnostics, medical insurance, medical equipment, fine chemicals and other allied sectors. Most of these sub-sectors unlike pharma generates majority of its revenues from the domestic market. With lack of medical infrastructure and facilities in India, we believe there is lots of opportunity for the incumbents to grow and penetrate the market.

Mirae Asset Mutual Fund is planning to launch a thematic healthcare focused fund, Mirae Asset Healthcare Fund. What is your investment strategy for this fund? What is your advice for investors who want to invest in a healthcare thematic fund?

We would follow a bottom-up stock selection approach, as we believe even though the sector has secular growth but the idea is to identify a business which is deploying the right strategy and preparing for the next growth way. The key criteria for selection would be (1) Sustainability of business model (2) Diversification of risks (3) Management quality (4) Strong balance sheet and Reasonable valuations.

The fund has the flexibility to invest across market cap and style in selecting investment opportunities within this theme; hence we will have a good blend of large, mid and small cap stocks. Healthcare is a broad secular theme that includes Pharma, Hospitals, Diagnostics, Insurance and other allied sectors; hence the portfolio will be diversified across these sectors. We will endeavour to maintain a concentrated portfolio of 30 - 40 stocks, with no stocks having disproportionate weights.

The healthcare industry, especially pharma is going through a consolidation phase, however there are indications that things would be stabilizing. It will not be a V shape recovery, so investors need to be patient and stay invested as healthcare universe is broader(not just pharma) and as I mentioned a secular growth theme.

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