Weekly Musings – NFO Pick (HDFC Pharma and Healthcare Fund)

11 Sep 2023 , 06:36 AM

In the latest weekly coverage on mutual fund NFOs, we cover the HDFC Pharma and Healthcare Fund. If you look at the universe of Pharma and Healthcare funds in India, the overall AUM is just about Rs16,600 crore or around $2 billion. That makes it much smaller than other sectors like banking and IT in terms of AUM. However, HDFC was one of the few large AMCs that did not have an exposure to healthcare funds in its portfolio, so this NFO fills up that gap in the HDFC MF offerings.

Also, pharma sector, as we shall see later in this note, is in a sweet spot. It has not been the most preferred sectors recently due to reasons like slowdown in the API market, price competition in the US markets and FDA objections to the practices followed by Indian pharma companies. However, there is now a shift to a new emerging model in pharma built around formulations, India franchise and CDMO and less about traditional US generics. That is what makes the HDFC Pharma and Healthcare Fund NFO interesting.

How the pharma and healthcare sector in India is structured?

The NFO of HDFC Pharma and Healthcare Fund will be open for subscription from September 14, 2023 to September 28, 2023. Let us start with an understanding of the pharma and healthcare sector in India and the emerging opportunity. The Indian pharma sector is looking at 3 major opportunities at this juncture.

• The first big pharma trend is the increased pharma spend by Indians. This is likely to be triggered by higher penetration in the Indian market, a larger chunk of ageing population with medical insurance and medicine affordability. Also, disease patterns are changing and that is likely to drive demand for pharma in India.
• The second opportunity matrix is the global exports opportunity. Here the big story in the last 30 years has been about targeting patent expiries and reverse engineering for exports. However, now the Indian pharma is also helping global companies in complex drug forays as well as helping big global pharma to outsource via CDMO etc.
• The third big advantage is the big boost to manufacturing of drugs in India via the Production Linked Incentive (PLI) scheme of the government of India. India already has the advantage of cheaper labour costs and an existing and thriving R&D ecosystem. These are the perfect building blocks.

Here the opportunity for India is not just in pharma but also healthcare. Hence the universe of coverage will include Pharma products like domestic formulations, US generics, US biosimilars and CDMO. On the healthcare front, the focus would largely be on diagnostics, hospitals and on retail pharmacy.

Why Indian pharma opportunity is beckoning?

There are some interesting statistical triggers why the Indian pharma opportunity is waiting to take off in a big way.

• Between 2012 and 2022, the average healthcare spending as a share of private final consumption expenditure (PFCE) has grown from 3.8% to 4.6%. That is encouraging growth, but in absolute terms, the opportunity is still huge if you compare with other Asian economies, where this ratio is substantially higher.
• India’s healthcare budget spend as percentage of GDP is the lowest among the BRICS nations. India spends just about 3% of GDP on healthcare while the BRICS average is around 8-10% and for developed economies it is in double digits.
• The third trend is on the mix of rural versus urban access to healthcare. Today, rural India accounts for 66% of population but has 10% of the medical specialists, 25% of the pharmacies and just about 40% of hospitals. This rectification will open up a huge opportunity for Indian healthcare.
• There are also other levers for the Indian pharma industry. In the last 10 years, chronic diseases have surged in India, calling for specialized healthcare. The elderly population is expected to grow by 13% by 2026, calling for huge outlays on healthcare at reasonable cost. But the big mega trend is longevity with lifespans up from 45 to 72 in last 60 years.
• Last, but not the least, affordability has increased due to the rapid spread of health insurance. COVID underlined the importance of health covers and the numbers are actually encouraging, even otherwise. Between 2014 and 2022, lives insured by private insurers are up 3-fold and government cover up 2-fold. The value of claims is up 5-fold.

It is the higher insurance penetration that will drive the move towards quality healthcare services.

What will drive growth of Pharm and Healthcare in India?

There are several powerful triggers for the Pharma and Healthcare industry in India. This includes core pharma, diagnostics, and healthcare.

1. Domestic pharma has grown at 11% CAGR between FY12 and FY22 and is likely to maintain that growth rate through FY30. The growth has been driven by volumes, price hikes and new product launches. Rural and semi-urban market share in terms of pharma penetration has increased to 37% currently; and is growing at a faster clip.
2. The hospital segment has a total addressable market (TAM) of Rs560,000 crore and has been consistently growing at CAGR of 12%. India has 15 hospital beds for every 10,000 population. This ratio is half of Vietnam, a third of China and nearly a fifth of Russia. That is a big opportunity to be tapped as healthcare gets more formalized.
3. Medical tourism is another major growth area with nearly 3 million medical tourists expected per annum in India by 2030. Medical tourism is growing at 30% CAGR for last 5 years and this pace is likely to be maintained. India offers world class healthcare at a fraction of the global costs.
4. Diagnostics is the other big untapped opportunity in India. The diagnostics market is still too fragmented. In the last 5 years, the share of organized diagnostic chains has just grown by 200 bps from 52% to 54%. This is another big challenge which several listed companies are already tapping.
5. Finally, we come to retail pharmacy. In India, organized retail pharmacy still commands just 10% as compared to 40-50% in countries like China, EU, and the US. Even within India, other sectors like apparel and electronics have a much higher share of organized retail as compared to the pharmacy segment.

Growth in Indian pharma will be across domestic formulations, CDMO, global biosimilars, hospital chains, diagnostics, and retail pharmacies.

Is Healthcare attractive from a stock market perspective?

How does pharma and healthcare fare in terms of the stock market opportunity and potential returns?

• The BSE Healthcare index is trading at 27X forward P/E ratio, which is above its historical average of 23%. However, if healthcare is removed, this premium compresses. The P/E ratio must be seen in the context of the robust earnings outlook.
• If you look at the pharma index, it has gone through phases of outperformance and flat performance over the years. However, the BSE healthcare index has outperformed the BSE Sensex 1-year, 5-years and 15-years horizon. However, it has underperformed the Sensex across 3 year and 10-year perspectives.
• The big advantage in the pharma segment is that there is a natural hedge due to the variety of products offered. If you look at the last 4 years, the best performers came from APIs, Healthcare services, APIs, and generics respectively. This also allows pharma companies to run naturally de-risked models.

The big advantage that a Pharma and Healthcare Fund brings, apart from growth, is the natural hedge in its business model.

Where will the HDFC Pharma and Healthcare Fund invest?

What is the universe of stocks that the HDFC Pharma and Healthcare Fund will invest in? Broadly, there is a universe of 99 companies that the fund will target. Out of this, pure pharma accounts for 71 companies, hospitals for 14 companies, diagnostics 8 and others are spread out. Out of the total universe of pharma and healthcare, 50% of the companies in market cap terms are large caps, 29% are mid-caps and 21% are small caps. So, there is a good mix of Alpha and Beta.

Here is how the portfolio will be structured The core portfolio will be 80% pharma and healthcare stocks, which will be invested in the universe of 99 companies as identified above. The fund will follow a multi-cap strategy, which is typically 50% into large caps and 25% each into mid-caps and small caps. In terms of investment philosophy, the fund will focus on identifying and capitalizing on trend shifts that will drive profits and the possibility of re-rating of the stock. The other theme would be to investment in companies which are either secular growth stories or where there is visible gain in the market share due to scale or greater shift to organized segment.

Key highlights of the HDFC Pharma and Healthcare Fund NFO

The HDFC Pharma and Healthcare Fund NFO is an equity fund with a spread of the portfolio across large caps, mid-caps, and small caps. Here are the NFO highlights.

• The HDFC Pharma and Healthcare Fund NFO opened for subscription on September 14, 2023 and will close for subscription on September 28, 2023, both days inclusive. It is an open ended fund, offering continuing purchase and redemption at NAV-linked prices.
• The HDFC Pharma and Healthcare Fund NFO offers a sectoral and thematic bet on pharma and healthcare. The theme carries the dual risk of equity as an asset class as well as the concentration risk of being focused on just one broad sectoral theme. On the SEBI Risk-O-Meter, it will rank as a high risk investment instrument.
• The primary objective of the HDFC Pharma and Healthcare Fund will be to generate alpha (above market returns) on the fund based on superior stock selection. However, the fund does not guarantee any form of returns.
• The HDFC Pharma and Healthcare Fund performance will be benchmarked to the S&P BSE Healthcare Index TRI (total returns index). As per SEBI regulations, mutual funds are required to benchmark performance with the TRI, which is the returns including dividends paid.
• There are no entry loads in India as per SEBI regulations. However, there will be an exit load of 1% of the NAV value, if funds are redeemed or switched out within 1 year from the date of allotment of units.
• NFO subscriptions in the HDFC Pharma and Healthcare Fund can be made in minimum parcels of Rs100 (SIP and lumpsum) and in multiples thereafter. The HDFC Pharma and Healthcare Fund offers regular plans and direct plans. In addition, it offers the Growth Option and the IDCW (dividend distribution) option.

The fund manager for the HDFC Pharma and Healthcare Fund will be Nikhil Mahur, who has an extensive background on the buy and sell side.

Understanding the Pharma & Healthcare Funds universe in India

Here are some major Pharma and healthcare funds in India.

Scheme  Name	NAV  Direct	Return 1 Year  (%) Direct	Return 3 Year  (%) Direct	Return 5 Year  (%) Direct	Return Since  Launch Direct	Daily AUM  (₹ in crore)
SBI Healthcare Opportunities	313.99	31.51	20.46	16.81	16.71	2,044.76
DSP Healthcare Fund	28.08	28.13	18.26		24.16	1,676.65
ICICI Prudential Pharma Fund	25.55	27.50	18.17	18.39	20.03	3,235.27
Nippon India Pharma Fund	381.28	25.84	19.07	16.99	17.21	5,601.20
Tata India Pharma Fund	22.84	24.69	18.97	17.14	11.32	672.41
UTI Healthcare Fund	202.91	23.89	16.10	14.78	14.50	787.35
ABSL Healthcare Fund	22.33	23.17	15.06		21.26	523.63
ITI Healthcare Fund	11.53	22.72			8.07	139.18
Mirae Asset Healthcare Fund	28.07	20.85	19.05	19.98	22.00	1,847.00
LIC MF Healthcare Fund	20.40	13.21	10.67		17.05	52.59

Data Source: AMFI

There are about 10 pharma and healthcare funds available in India today with total AUM of Rs16,600 crore. As can be seen in the above table, 1-year returns are attractive, as is longer term CAGR returns. Investors must keep in mind this thematic risks while applying for the HDFC Pharma and Healthcare Fund NFO.