Investors need to bring down their return expectations from pharma stocks to 15% from 20-25% clocked in the last five years, said Sailesh Bhan, deputy chief investment officer, Reliance Mutual Fund. In an interview to Prashant Mahesh, Bhan, who manages the fund house's pharma scheme, said pharma companies need to be careful in acquisitions. Edited excerpts:
Q- The healthcare index is down by 10.61% since the start of the year, against the Sensex which has lost 3%. What is the reason for this underperformance?
A- A couple of things have happened since 2008. The weight of the sector in the Sensex which used to be 3% has moved up to 12%. This journey has given huge returns to investors and reflects the outperformance of this sector. Today, there is significant and meaningful ownership in this sector, while competing sectors have seen erosion in ownership.
Strong returns in the last 4-5 years have created a high multiple base for a lot of companies and the markets are pricing in their ability to repeat that kind of growth. This appears challenging, which has led to a derating of the sector, especially for companies which are oriented to international markets. Earnings outlook has slowed down on the international side, due to regulatory reasons where approvals are slow or simply due to the fact that the base is large for them to rapidly grow in international markets, unless you have an existing portfolio.
However, the stock price correction seems to be over and now they should consolidate at these levels. From here on, investors should bring down return expectations to 15%, compared to the 20-25% they got earlier.
