Sector Analysis: Beyond the Pill
Exploring new sector for investment
Post Covid in 2021, everyone thought that the Healthcare sector would do exceptionally well. I was also excited about the healthcare/pharma sector. AMCs started launching pharma ETFs and index funds. ICICI Launched India’s first healthcare ETF and I invested in it. However, as months passed, the news of pharma being the next big growth sector faded. I lost confidence in the sector and excitement. I exited my investment.
Three years after the exit, I am considering investing in the Indian Pharma industry. Here are two reasons why I am considering:
Valuation looks decent (Compared to the overall market)
A lot of positives for the Pharma/Healthcare sector in India.
Before discussing my investment plans, let me talk about the sector.
Healthcare is a Complex Sector
First things first, the healthcare sector is super complex and I won’t be able to go into all the details and explain everything. However, the idea is to show you a glimpse of why this sector will do well. Let me first break the sector down for you:
Category 1: Pharmaceutical Companies
These are further divided into three subcategories
API Manufacturers: Active Pharmaceutical Ingredients (APIs) are the essential building blocks of drugs.
Contract Development and Manufacturing Organizations (CDMOs): CDMOs provide contract research, development, and manufacturing services to pharmaceutical companies.
Multinational Corporations (MNCs): Several global pharmaceutical giants have a significant presence in India, either through subsidiaries or joint ventures.
Category 2: Hospitals
The Indian healthcare sector includes a mix of public and private hospitals, offering various medical services and treatments.
Category 3: Diagnostics
The diagnostics sector provides laboratory services, medical imaging, and other diagnostic tests to support healthcare providers.
There are many companies under each, so understanding or evaluating the pharma or healthcare sector is tough. I will not go into any details, I will simply lay down 3 points that I believe favor the Indian pharma sector and therefore must be on investors’ radar
Four reasons Pharma is a good long-term bet now
Here are the top four reasons as per analysis:
Reason 1: China + 1 Strategy
Like every other industry, China+1 will benefit Indian pharma companies. Many multinational pharmaceutical companies are increasingly looking to diversify their supply chains away from China due to geopolitical tensions and potential disruptions. India's strong regulatory framework (more on this in other points), skilled workforce, and cost-effective manufacturing capabilities make it an attractive alternative for these companies.
Reason 2: Change in ViewPoint of Indian Pharma
Indian pharmaceutical companies have made significant strides in improving product quality and innovation. This has led to a more positive perception of the Indian pharma sector globally. These factors have contributed to a surge in exports of Indian pharmaceutical products, indicating growing global demand.
Below are some screenshots suggesting the change in perspective. US FDA regularly inspects the Indian pharma companies and the outcome of the inspections are changing (there is lot to it, the key takeaway for you is the numbers are improving - you can study more for better understanding).
Reason 3: India Getting More Orders on API and Research Drugs
The COVID-19 pandemic highlighted the global shortage of APIs, leading to increased demand for Indian manufacturers. Indian pharmaceutical companies are investing in research and development to develop new drugs and therapies, attracting global partnerships and collaborations.
Reason 4: India’s dependency on China reducing for API
India’s pharmaceutical sector is highly dependent on China for key Active Pharmaceutical Ingredients (APIs), which infuse the therapeutic value in drugs. Due to cheaper option of imports, India imports about 68% of its requirements of APIs from China. The Trade Promotion Council, puts the figure of API dependence on China at about 85%. India’s dependence can be understood from the fact, that during the year 2021, overall 70%, of APIs in general and 90% of APIs in particular.
For FY24, the numbers have come down to 50% which is a great positive.
I would love to read your thoughts on the sector. Please put them in the comments.
How to invest in Indian Pharma Companies?
There are three ways to take advantage of this growing industry:
Buy stocks: Well, to be honest, it is not possible for me to analyze this industry and pick a few stocks. If you can, please do ahead.
Invest via MF: You can pick healthcare mutual funds and invest in them.
Invest via ETFs: The best option that I see is to invest in healthcare/pharma index via ETFs.
The route I am taking is ETFs. There are 4 ETFs in the healthcare sector (at present):
ICICI Prudential Nifty Healthcare ETF
Aditya BSL Nifty Healthcare ETF
Axis NIFTY Healthcare ETF
DSP Nifty Healthcare ETF
If you compare these options, ICICI is the clear winner.
I will start investing in the ETFs soon via SIP route. I will lay down the exact strategy in the next week’s newsletter. So, do subscribe to the newsletter.
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