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Kotak Pharma & Healthcare Investment Approach
Fund Snapshot
| Types of securities | Listed Equity |
| Fund Type | Multi Cap PMS |
| Benchmark | Nifty Pharma |
| Minimum Initial Investment | 50 Lakhs |
| Inception Date | September 2016 |
| Fund Manager | Anshul Saigal |
| Investment Horizon | Open Ended, minimum investment of 3 years |
| Risk associated with the investment approach | Risk related to Equity and Equity related Securities, Moderate Risk |
Kotak PMS – Strong Pedigree And Client Focus
PROVEN TRACK RECORD OF MARKET BEATING PERFORMANCE
- Since inception (20th Sept 2016), Kotak Pharma & Healthcare Investment Approach has generated an alpha of 9.6% CAGR over Nifty Pharma Index
STRONG RESEARCH AND OPERATIONS TEAM
- 14 member research team
- In-house, top-notch, IT systems and back-office support
CONSISTENT CLIENT INTERACTION
- Quarterly performance reporting
- Fund manager outlook
Broad Investment Strategy
- LARGE MARKET OPPORTUNITY: Market size should be at least 2x company’s current sales. This gives the company a long runway for future growth.
- BUSINESSES WITH ROBUST COMPETITIVE ADVANTAGES: Strong brands, High Switching costs, Network economics, Low cost advantages or Innovative products.
- STRONG FINANCIALS AND EARNINGS GROWTH: We prefer low debt companies and our portfolio debt to equity is under 0.5x. We prefer Pharma and Healthcare companies with earnings growth and margins higher than their peers.
- MANAGEMENT DYNAMISM AND GOOD CORPORATE GOVERNANCE: We prefer companies with passionate and transparent management. Asset turns and working capital turns at industry levels or trending there
- FAIR VALUATIONS: We look to buy businesses at fair valuations, where future earnings growth is not priced in.
Investment Objective
The main objective of the Investment approach is to generate capital appreciation through investments in equities with a medium to long-term perspective.
Investment Approach
The Investment approach will invest in all equity and equity related instruments with emphasis on capturing available opportunities in Pharma and Health care related stocks.
Basis of selection of such types of securities as part of the investment approach
The Investment approach will invest in all equity and equity related instruments with emphasis on capturing available opportunities in Pharma and Health care related stocks
Allocation of portfolio across types of securities
The portfolio would be diversified, with a mix of small, medium, and large cap companies.
Near-term Hiccups, But Long-term Visibility Intact
India Sales
India sales likely to see better growth in FY22 led by volumes, price hikes, and new launches.
Pharma Growth
Near term growth for Pharma companies would be moderate. Margins may be under pressure because of sharp increase in raw material prices.
US: Volume
Volume impacted, pricing pressure is back given supply chain issues have normalized. US growth visible from H2FY22/FY23 led by pipeline – companies with wider basket of products to see steady growth aided by new launches.
India: Volume
Volume remains weak. Competition has increased in Covid portfolio.
Domestic Formulations: Recovery Ahead As Moats Intact
COVID-19 impact
Lower Selling General & Administrative expenses, disruption in travel and marketing activities due to lockdown, but stretched working capital cycle (to enhance sales)
Business realignment
Rationalization of existing brands, Redistribution of Medical Representatives to new business division from existing pool (instead of new hiring) to improve productivity.
Focus on wellness consumer pattern changing
Segments like preventive care, vitamins seeing strong traction as consumers’ inclination towards Immunity, safety, and risk avoidance increasing
Investment in digital capability
To streamline supply chain, working capital optimization and market insights, Use of digital channels to connect to doctors, customers etc saves cost and time as well as increases reach.
Why Pharma & Healthcare Makes Sense Now?
- Production-Linked Incentive (PLI) To Significantly Achieve Backward Integration Of Indian Pharma Exports
- Return Ratios Improving, As Negative Operating Leverage Reversing
Contract Research And Manufacturing Services (CRAMS)
Global CDMO Market To Grow At The Steady Rate
As companies are facing higher R&D costs and a need to invest in new capabilities as a result of the rapid growth in demand, lowering the cost of pharmaceuticals becomes more complicated, leading some companies to seek outsourcing partners to generate savings.
CDMO Offers A Higher Margin And Return But Has Higher Gestation Growth Period
- CDMO companies have a superior growth, margin, return profile and lower leverage.
- The small basket of CDMO/CRO business in India also potentially attracts a scarcity premium.
Active Pharmaceutical Ingredient (API) Opportunities And China +1 Advantage
Key Drivers For Indian API
- Backward integration into KSM (Key starting materials)/Intermediates post-2018 has accelerated.
- Price increases for API’s to sustain as customers demand quality and steady supplies
- Higher costs in China due to chemical blasts, environmental issues, higher wage bills, GMP compliance, transit from polluting zones to green zones.
- PLI scheme introduced by the Government to build self-sufficiency in API’s, KSM & Intermediates and reduce dependence on China – investment projects of US$ 2bn awarded to key players (focus on 53 API’s & intermediates).
- New opportunities in API segments have emerged led by China+1 factor, supply disruptions and price
- increases across API segment.
India Expected To Grow At The Faster Rate Than China And Rest Of The World
The market opportunity for Indian API industry has a potential to more than double to US$ 24bn in the next six years, led by
- Increased domestic demand for API’s required for local consumption and formulation exports.
- Replacement demand for Chinese imports of ~US$ 2.5bn.
- Incremental boost for API exports aided by China+1 factor and supply disruptions, new customer enquiries.
Key Reason To Choose India Over China
Deteriorating relations of China with Rest of the World
- Negative sentiments against China due to coronavirus
- Raw material concentration risk observed at global level.
- US imposing trade bans on China.
Growing quality concerns
- Increased fraudulent practices in the majority of the plants
- Manufacturing in unsterile environments (
- Lesser number of USFDA approved plants (100+ (India) versus 28+ (China).
Pandemic breakout
- Supply chain disruption – Plants located in hotbeds of China have been partially closed.
- Halted inspections by FDA of certain drugs from China
Shrinking price gap
- Increased costs over net benefits in the long run due to:
- Quality concerns
- Complex importing regulations
- Repeated/failed inspections
Top Holdings
Security Name
- Sun Pharmaceutical Industries Ltd
- Dr Reddy’s Laboratories Ltd
- Cipla Ltd
- IPCA Laboratories Ltd
- Fortis Healthcare Ltd
Key Contributors
- Sun Pharmaceutical Industries Ltd
- Zydus Lifesciences Ltd
- Dr Reddy’s Laboratories Ltd
Key Detractors
- Gland Pharma Ltd
- Divi’s Laboratories Ltd
- Biocon Ltd
