Pharma funds may take a hit in the face of China lockdown

The lockdown in parts of China in the wake of the coronavirus outbreak can stem the stellar performance shown by pharma funds in recent months. Fund managers believe domestic pharma companies may face challenges if supply chain issues in China continue for another couple of months.

In the one-year period, pharma funds have given average returns of over 18 per cent, outperforming 12 per cent gains posted by frontline indices, such as the Sensex and the Nifty. “Domestic pharma firms, which are importing raw materials from China, have inventory for one or two months. But, if there is any prolonged impact, it could lead to some production disruptions,” said Mahesh Patil, co-chief investment officer of Birla Sun Life Mutual Fund (MF).

On Thursday, Icra revised its outlook on Indian domestic pharma industry from stable to negative due to ongoing lockdown in parts of China. The rating agency said domestic pharma industry is heavily dependent on Chinese imports for raw materials, with China accounting for 65-70 per cent of active pharmaceutical ingredients (APIS) and other intermediates coming into India.

The rating agency underlined that the situation can get more alarming in the cases of some key starting materials, or KSMS, where China is the exclusive supplier.

In another note, rating agency Crisil said India continues to lack capability to produce KSMS or intermediates manufactured in China, and cited rise in raw material costs, already seen by some domestic pharma players.

Experts say domestic pharma industry may still be able to manoeu

Pharma funds have given robust returns in recent months (%) 1 year 3 months 1 month vre around the supply chain issues if the situation turns more acute. “We could see domestic API manufacturers increase their capacity to meet the demand gap caused by Chinese cutbacks. Given the importance of the sector for the society, the government is also expected to ensure that there are major challenges,” said Sailesh Raj Bhan, deputy CIO at Nippon India MF.

Meanwhile, the share prices of domestic API players have been seeing a strong run-up amid expectations of higher demand due to Coronavirustriggered lockdown in China.in yearto-date, these stocks have given returns of 30-100 per cent. Some of the top gainers include Granules India (42 per cent), Shilpa Medicare (73 per cent), Lasa Supergenerics (120 per cent) and IOL Chemicals & Pharmaceuticals (50 per cent). On Monday, some of these stocks continued to see an uptick even as markets declined 2 per cent over the fears of Coronavirus outbreak. Shares of IOL Chemicals were up 8.3 per cent, Lasa Supergenerics and Shilpa Medicare were locked at upper circuit of 5 per cent.

Domestic pharma firms have also created captive units to meet their API needs. “Some firms have been creating captive units as part of their backward integration programme,” Patil said.