With a 60 percent gain, the pharmaceutical sector was one of the best performing indices of 2020. According to Aditya Khemka, Fund Manager of InCred AMC, the recovery of return on equity is the key parameter of the recovery in pharma stocks in 2020.
“For 2020 what created the outperformance for the pharma companies was not exactly the COVID-19 pandemic, it was actually the fact that most of these pharmaceutical companies started showing an uptick in the return on equity. If you see the fall in pharma companies from 2015 to 2019, the majority of the fall happened because pharma companies started showing declining return on equity and that recovery of return on equity started in 2020. To my mind that is the key parameter of what led to the recovery in pharma stocks in 2020,” Khemka told CNBC-TV18.
Khemka said that he expects a similar performance from the sector in 2021.
“I don’t expect 2021 to be any different. We will see an uptick in return on equity in most pharma companies given that they have already done multiple investments in sectors, foreign businesses where they are yet to ramp up or are yet to monetize those investments. So, that should happen in 2021 and that should continue to reflect in stock performance and outperformance of the sector versus the broader market,” he said.
Khemka believes that pharma companies that have exposure to acute portfolios will recover in 2021. He also expects hospital and diagnostic business to normalise. However, Khemka is wary on the US generic side of the business and said that he would not look at investing a large part of the portfolio in that segment.Watch the video for more