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R Sukumar, Fund Manager, KP Pharma Fund, on the potential of Pharma Sector

"Investors should be prepared to hold any equity fund through economic and stock market cycles "

R Sukumar is managing Kothari Pioneer Pharma Fund since inception in April 1999. Except a few isolated bouts of buying, the markets have given a cold shoulder to pharma stocks. The Rs 52 crore fund has been a non-performer since launch with an annualised return of (-) 1.02% and has marginally under performed BSE Healthcare index. The last one- year has been no different with the fund losing nearly 30% as on January 31, 2001. However, Sukumar continues to be bullish on the prospects of the sector and advises investors to be patient with their investments.

Q. What is the holding period that you would suggest an investor in a pharma fund and what would be a reasonable return he could expect in that period?
Sukumar: My view is that investors should be prepared to hold any equity fund through economic and stock market cycles. Normally, these cycles repeat every 5 years or so. So, I think that the investors should hold for at least 5 years. In this period, I expect the effects of valuation cycle as well as demand cycles to even out and the sheer performance of companies in the portfolio to reflect in stock prices.

Q. The scope of pharma sector continues to be immense with rising awareness levels and a huge market always termed as a big advantage. What, in your opinion, are the factors that can give a fillip to the sector on the bourses?
Sukumar: Though the opportunities are immense, the sector has been plagued by government policies on price control, delays in introducing a well-defined patent regime and lack of organized health care infrastructure and support (like health insurance). Any positive action in any of these fronts will help, and we expect some developments in the next two years.

Q. What is your investment strategy for the fund?
Sukumar: Our investment strategy is to identify stocks, which are undervalued considering their potential and ability to tap emerging opportunities in the domestic and international markets resulting in wealth generation for investors. We have hiked stakes in some MNC stocks, which have come off due to lack of any immediate positive triggers, but have the potential to re-engineer themselves and grow in the medium term.

Q What are the special segments in the pharma industry that you are looking at, which could give higher than average returns in the future?
Sukumar: We are looking at all segments of the pharma sector and we see opportunities in all of them. Stock selection would of course depend on the companies' ability to profit from opportunities in one or more of these segments. My view is that taking a blind bet on one segment and investing in any stock in that segment is not going to help. To give an example, while there are opportunities in research and development, probably not more than 10% of companies spending money on this are going to benefit substantially. So, our task is to identify these companies, rather than make a call that we will buy all companies that have R&D spending. The ability of a stock to give superior returns depend on the company having a clear vision and leadership in the segments in which they operate.

Q Given the highly fragmented sector, When do you expect mergers and acquisitions activity to pick up in the sector? How much could M&A contribute to perk up valuations of the sector?
Sukumar: M&A activity is already happening at a steady pace. American Remedies was acquired by Dr Reddy's Laboratories. MNCs like HMR, Glaxo, Knoll and Pfizer have seen activities induced by their parent's activities. A lot of brands have also changed hands. I expect this to continue for the next few years.

Q. Are you looking favourably at those companies, which have their R&D setup or those, which are engaged in reverse engineering?
Sukumar: As I mentioned earlier, only a few companies can benefit substantially from R&D. It is the same in the case of reverse engineering. We do not invest in all or most companies engaging in an activity that might be fashionable at a point of time. We have a stock selection process that is bottom up and focuses on its ability to generate wealth for investors.