Shivani Bazaz spoke to
Sailesh Raj Bhan, who manages Reliance Pharma Fund, to find out his secret recipe.
Reliance Pharma Fund has topped the pharma category with around 16 per cent returns last year. How did you achieve this?
Since its inception (June 5, 2004) Reliance Pharma Fund’s NAV has grown 13.6x (times) or in other words the fund has delivered 20.51 per cent compounded annualized returns in nearly 14 years (data as on May 30, 2018). During this period the focus has always been on buying good quality businesses at reasonable prices and staying invested through the years to get compounding benefits. Despite the last three years of the sector being tepid, the focus on quality companies and discipline on valuations has enabled the fund to achieve its objective. The cautious stand on US businesses for the last two to three years and the focus on domestic businesses has supported the fund performance in the recent past.
The performance is even more astounding because most of the schemes are giving single digit returns.
Given the focus on “sustainable profitable growth at reasonable prices” as a investment style, Reliance Pharma Fund was disciplined to avoid sub-scale and inferior businesses in its journey. This immensely benefited the fund as inferior companies completely got decimated in the last two years of weak pharma sector cycle.
The scheme is betting on stocks focusing on domestic consumption. Has this approach helped the scheme?
India has high incidence of chronic diseases – diabetes, cardiac, thyroid, etc which needs pharmaceutical intervention to maintain quality of life. Rising diagnostics and testing facilities, rising incomes and focus on health is driving demand. Reliance Pharma Fund invests in leaders in these categories which serve long term patient needs. Most of these businesses have consumer characteristics like high free cash flows due to low capex and are primarily marketing brands to consumers. Interestingly in the stock markets, these businesses trade at 30-40 per cent discount to pure FMCG companies, despite having the same opportunity of scale and penetration. Hence pharmaceutical companies with domestic opportunity provide sustainable long term growth and have tremendous potential.
Around 50 per cent of the assets in the scheme are concentrated in the top five stocks. Has this concentrated approach worked well for the scheme?
Interestingly, pharma sector provides for some level of diversification unlike other sectors as it has many sub-segments with different drivers – for example, domestic branded companies, US generic businesses, emerging market branded businesses, contract research companies, hospital and healthcare services. Reliance Pharma Fund’s exposures are generally in companies with long operating history and with leadership characteristics and are spread across the above mentioned five sub categories in the pharmaceutical space.
What is your outlook for the pharma sector in the next three to four quarters? Pharma sector is going through a bad phase. The valuations are attractive in the sector but are there enough opportunities for growth?
Pharma sector in India is in its early stages of growth with many opportunities to gain from. Indian domestic market is significantly under diagnosed, under penetrated and has years of growth ahead, given the high level of incidence of chronic diseases in India. Health insurance penetration and associated healthcare infrastructure like hospitals are still in early stages of growth and will create a large opportunity. In international markets, Indian companies have demonstrated strong successes and as environment improves will be major beneficiaries given their skill and cost advantages.
In the near term, earnings for domestic businesses should continue to trend strongly, while recovery in US business from the low base should get visible to investors. Given the last 2-3 difficult years for the sector, the opportunity is attractive as growth returns and investors start focusing beyond the US generic challenges.
Do you think it is a good time to start investing in pharma sector funds? What should retail investors expect from the pharma funds? Should the return expectations be modest?
The earnings in the pharmaceutical sector are likely to improve, given the low base of last three years, resolution of FDA related challenges (with time already elapsed) and strong growth in domestic market. The recent depreciation of the currency will also support earnings of exporting companies. Given the improvement in outlook for earnings and medium term growth prospects and valuations correction of the last three years, the sector provides a good long term opportunity.