Will It Be A Healthy FY25 For Pharma Sector?
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00:00Aditya Khemka, fund manager of Incred Asset Management, joins in with his view on the
00:04Healthcare Pact.
00:05Aditya, before I go into earnings, just before you joined us, we were talking to Himanshu
00:09Baith of Polymedicure.
00:10They have had a very successful QIP with some very solid hands like Lighthouse, Nomura and
00:18SPI coming in.
00:19Expansion plans are looking ambitious over the next three to four years.
00:23Do you track Polymedicure?
00:24Do you feel like this could be a stock that may potentially turn out to be a multibagger
00:28and should be on a strategic pharma allocation in one's portfolio?
00:32Yeah, good morning and thanks for having me.
00:36So yes, we feel that medical devices as an industry in India has a lot of scope to grow.
00:41Obviously, the PLI scheme and the imposed substitution, China plus one, these are the
00:45factors that will help the business to grow.
00:47Polymedicure as a stock, we do not own it, hence we cannot comment much on it.
00:52But we feel that the opportunity is large and all the players in the space should benefit
00:56from the opportunity.
00:58You should benefit from this opportunity.
01:00You do think it's a good space that one could consider investing in.
01:03Well, let's start with earnings now and I just want to wrap up the quarter one earnings
01:08because most believe that it's been a good quarter.
01:12If you split it up between the international business, India business, the drop in raw
01:16material prices, healthcare has stood out.
01:19Tell me, what is your macro sort of takeaway from the first quarter and what are you expecting
01:25into FY25?
01:27I want a word on the U.S. generic space as well because of the election overhang or rather
01:31the outstanding election, impending election in the U.S., pharma is one sector that could
01:36get impacted.
01:37So how would you strategically position yourself?
01:41So we feel that the unbranded space in 1Q FY25 did exceptionally well and that's a space
01:48that we generally don't invest in because it tends to be very unpredictable in a low
01:53ROE business.
01:54But truth be told, the first quarter FY25 numbers were beyond our expectations in the
01:59space.
02:00However, we are not sure of the sustainability of such earnings that the space is reporting.
02:04We believe the next three to four quarters may be good in the space, but then the space
02:09would normalize.
02:10And once it normalizes, stocks which are more exposed to that space may not be doing as
02:15well as they have done in the past couple of years.
02:18So I think that's where unbranded genetics is probably at their peak profitability at
02:21the current time and the stocks which are exposed to that are also trading at peak multiples.
02:27So when you have peak profitability married with peak multiples, generally that's a recipe
02:31for some difficult outcomes.
02:36So as investors, we tend to stay away from such spaces where we feel earnings are not
02:40sustainable and multiples are too high.
02:44So that's where unbranded genetics stand out.
02:47For us, we don't invest in that space as of today.
02:50We don't see any value in it and we doubt the sustainability of the earnings.
02:55On the branded genetics side, in the FY25 numbers were extremely good.
02:59Top line growth was good, volume growth was good and margin expansion did happen.
03:02So that's something we remain positive on.
03:04However, there are stocks in the space which have become extremely expensive and that worries
03:09us because we don't want to invest in a good business model at any price.
03:13We want a risk reward ratio which is in our favor.
03:16So branded genetics now have become fairly selective in terms of how we pick stocks in
03:21this space.
03:22On the API CDM of space, again, earnings remain lumpy.
03:26So some companies reported a great quarter while other companies reported a benign quarter.
03:32But that tends to be the nature of the beast.
03:35It's a business that tends to be volatile between quarters and even between years.
03:39So we don't try to look at this business on a quarter-to-quarter basis, we look at it
03:43more from a year-to-year basis.
03:46So we continue to believe the CDM of space will do extremely well over the next 5-10
03:49years.
03:50This is a mega trend which investors have to be aware of and have to play in the next
03:5410 years.
03:55Hospital earnings were brilliant in the last quarter.
03:59Again, RPOV growth was great, there was volume growth.
04:02However, many hospital stocks, especially the larger ones, have become prohibitively
04:06expensive.
04:07Some of them are trading at 65-80 times operating cash flow in terms of enterprise operating
04:12cash flow.
04:13And that's a multiple we are not happy with.
04:15We do have a couple of hospital stocks in our portfolio, but these stocks tend to trade
04:19at 17-25 times their operating cash flow rather than the 65-80 times for the larger companies
04:25that we do not own.
04:26So we are again value-oriented in the hospital space today because the larger names have
04:30become just too expensive to invest in today.
04:32Last but not the least, diagnostics, I think that's where the biggest positive surprise
04:36happened in the space.
04:39So diagnostics reported very healthy volume growth, price recovery has happened.
04:43So in the past, because of online platforms launching diagnostics, there was some disruption
04:47in pricing.
04:48That seems to be over now.
04:49And most diagnostic chains are taking price increases, so there has been a positive earnings
04:53surprise for us.
04:54And we still find many stocks in the diagnostics space which are fairly valued or below fairly
04:58valued.
04:59So that's a great area of interest for us because the earnings are improving and valuations
05:03are in our favor.
05:04So that's the space we are most bullish on at this stage.
05:07At a broader level, what we are seeing in the market space is that investors are rotating
05:11money from growth-oriented sectors to value sectors, and that which is where I think healthcare
05:16is finding favor today.
05:17Yeah.
05:18Yeah, Aditya, very detailed response there on how, you know, INCRED looks at every segment
05:24of the healthcare space, Tamanna here.
05:26Let's just get into a bit of detail and minutiae of how that translates into specific stocks
05:32and sectors.
05:34Pharma, seen as a defensive play, has seen a fair bit of interest recently.
05:39So if I were to ask you, let me come to CDMO first, because you were most constructive
05:43on CDMO and you said that's a mega trend that you have to follow.
05:46What are the companies at the forefront of that mega trend in your view?
05:51So in our portfolio, we have Jubilant Pharma, we own HiCal, we own Syngene in the space.
05:58And again, the reason why we choose these companies is because we want to be focused
06:01on companies that do CDMO for innovators, and not necessarily just CDMO for generics.
06:07Because we feel CDMO for generics is a more, it's a more fragile business, and that business
06:12tends to be lower margin, lower ROE, compared to CDMO for innovators, which tends to be
06:17higher margin, higher ROE businesses.
06:19So CDMO for generics is something we like to stay away from, and CDMO for innovators
06:25is where we put our money to work.
06:28Let's come to the hospital sector.
06:30And you're absolutely right, Q1 has been good for the hospital space in a quarter, which
06:36is traditionally not their best, necessarily.
06:39But you're talking about valuations, which do you think have now run up beyond valuations?
06:44And where do you still see some steam left to go in the hospital space?
06:52So look, it's difficult for me to talk about what we do not own.
06:55So I will be talking about what we own.
06:57So what we own, valuations are reasonable, so we own Healthcare Global, which is a super
07:02specialty oncology focused healthcare chain.
07:05And we own Astridium, which is again, a South India focused multi-specialty, where again,
07:11valuations seem to be very, very favorable for the investors.
07:14Okay, so let's assume what you do not own is also part of the bucket of stocks that
07:19you think are richly valued.
07:21Just, you know, as we have a couple of minutes left, Aditya, I want to understand what are
07:25the policy driven sort of headwinds that the pharma sector may face?
07:31Because you're seeing a kind of a rejuvenation.
07:33But just recently, for example, the government has loosened up some of their imports on,
07:40you know, certain segments for various reasons, diabetes, drugs, cancer, drugs, etc.
07:45There are some companies who have pretty decent monopolies in this space.
07:50Do you see such policy headwinds going further?
07:52And which do you think are the companies that could get most impacted?
07:57So look, in the pharma space, there are generally three, four types of regulations.
08:01Let's take them one by one.
08:02So firstly, it's obviously the domestic market price regulation that the government comes
08:06up with.
08:07And there are fixed-loss combination bans that keep coming here and there.
08:10So that's always something that exposes branded generic companies to that kind of regulation.
08:14But within the branded generic universe, I think MNC Pharma companies, the Glaxo's, the
08:19Abbott's, the Pfizer's, the Sanofi's, they are more exposed to these regulations because
08:23they tend to have products which are on the higher end of the pricing spectrum.
08:27And therefore, you know, when the product comes under price regulation, these are the
08:30companies which bear the brunt of, you know, majority of the brunt of the price regulation.
08:35Coming next to another regulation that generally tends to happen is the USFDA issues, right,
08:41that you hear about.
08:42Now that generally impacts the unbranded generic pharma companies more than any other bucket.
08:46And the unbranded generic pharma companies, again, is a space where, you know, we find
08:50regulatory challenges, we find margins are lower, we find ROEs are lower.
08:55So you know, that's a space that we completely avoid investing in, although it's a large
08:58part of the index.
08:59It is about 50% of the index, like an FD Pharma index or a BSE Healthcare index.
09:04But you know, that's a space that we really want to avoid because there's a risk of what
09:08isn't in favor of investors today.
09:11Another challenge that keeps happening is in terms of regulatory landscape, is the availability
09:17to import or export, because government sometimes tends to put restrictions on import or exports
09:21because they want certain drugs to remain in the country, or they want the country to
09:25be self-reliant in the matter of certain drugs.
09:28But that's always healthy for the industry, you know, in the short term, it may lead to
09:31some cost pressures or growth challenges, but over the longer term, if the industry
09:35becomes self-reliant, it's always better.
09:37We have seen historically, you know, countries like China being hostile when times are tough.
09:42So we saw the COVID time, China was the first country to come up with a COVID vaccine.
09:46But they were the last country to sell the COVID vaccine to anybody else.
09:50So, you know, they weaponized the disease, they weaponized their ability to create a vaccine.
09:53India, on the other hand, was, I think, third or fourth to come up with a vaccine, but we
09:56were the first to give the vaccine for free to our neighboring countries.
10:00So the geopolitical dividend we earned during COVID was big.
10:02Okay, I'm out of time.
10:04Sorry, Aditya.
10:05I'm just going to wrap up.
10:06I want to get your topics.
10:08Let's give the viewers, you know, a clear takeaway before we wrap the show.
10:12What would be your top three companies in the pharma space today?
10:17And would Divis be on that list?
10:18I'm asking because of the kind of run-up Divis has had.
10:21Sure.
10:22So the top three positions that we have in our fund are Thyrocare, Jubilant Pharma and
10:26Krishna Diagnostics.
10:27Sorry, which was the first one?
10:30Thyrocare Technologies.
10:31Okay.
10:32Thyrocare, Jubilant and Krishna Diagnostics.
10:35All right.
10:36We'll have to let you go, Aditya, but absolute pleasure speaking with you.
10:40Thank you so much for joining us.