In addition to sound fundamentals, buying interest from institutional investors — foreign institutional investors and mutual funds — also supported the rally in pharma stocks. But the stock choices of these two classes of investors have been quite different.
Buying large-cap
In the last one year, FIIs have been buyers in Indian pharma stocks.
Dr Reddy’s has been the top addition in the large-cap space; FII holding in the stock has increased from 32.7 per cent at the end of June 2013 to 35.3 per cent this June. Strong performance over the last few quarters and a sharp 20 per cent-plus correction in the stock price during the first half of 2014 possibly triggered buying interest in this stock.
Other stocks where FIIs have taken fresh positions in the last one year include Ranbaxy Labs (2 per cent increase), Lupin (1 per cent), Cipla (0.58 per cent), Cadila (0.51 per cent) and Sun Pharma (0.19 per cent). Sun’s acquisition of Ranbaxy and the former’s good long-term prospects may have evoked interest in Sun Pharma’s stock, despite the strong rally in the stock over the last year. FIIs may have capitalised on the Ranbaxy route to buy into Sun Pharma.
For Cipla, improvement in profitability on a sequential basis due to concerted efforts to scale down low-margin businesses, expected pay-offs from its investments such as the inhaler franchise in the EU have added to the attractiveness of the stock.
Though FIIs have increased their exposure to Lupin in the last one year, they have marginally reduced exposure in the last six months. However, next to Dr Reddy’s, FIIs hold significant stake in Lupin.
As of June 2014, FII holding in the stock stood at 31.7 per cent.
FIIs have also picked up a reasonably big chunk in select small- and mid-cap pharma companies. Aurobindo Pharma tops the list; foreign institutions have bought an additional 9.72 per cent of the company’s total equity in the last one year. Shasun Pharma was the other stock which saw significant increase in FII holding — from barely 0.1 per cent last year to 6.68 per cent as of June 2014. Equity investment by animal health JV partner Sequent Scientific may have aroused institutional interest in this stock.
Other small-cap names that have seen significant increase in FII holding include Natco Pharma, Ajanta Pharma, Shilpa Medicare, Sequent Scientific, Granules India and Bliss GVS Pharma. In the mid-cap space Torrent Pharma and Divi’s Labs were favoured by FIIs.
Sellers in MNCsWhen it comes to their investment calls on multinational pharma companies, FII moves have largely been on expected lines. Barring Pfizer India and AstraZeneca Pharma (India), where foreign institutions have bought 0.97 per cent and 0.65 per cent of their respective outstanding equity, they have been reducing exposure to other multinationals.
They have sold a little over 21 per cent in GSK Pharma during the year; possibly offloading a large part of their holding during the open offer made by the parent in February this year.
They have also trimmed holdings in Abbott India, Sanofi India, Merck and Wyeth India.
But what did MFs bet on?
Domestic mutual funds did quite the opposite of what their foreign peers did! They were buyers in stocks of most multinationals even as FIIs held a bearish view on these stocks, GSK Pharma, Pfizer India and Sanofi India being the exceptions. Merck India topped the list of stocks that saw an increase in mutual fund holding — from 7.9 per cent at the end of June 2013 to 9.97 per cent as of this June. Novartis India, Abbott India, Wyeth and AstraZeneca were the other multinational companies that appealed to domestic fund houses.
They sold most large-cap stocks which were picked up by FIIs — Dr Reddy’s, Ranbaxy Labs, Cadila Healthcare and Sun Pharma were their top sells. However, Lupin and Cipla did find some appeal among MF houses; their holdings in these stocks have gone up by 0.48 per cent and 0.16 per cent, respectively, in the last one year.
Not surprisingly, MFs were sellers in the small-cap stocks that were bought by FIIs.
The list includes Natco Pharma, Aurobindo Pharma, Shasun Pharma and Dishman Pharma. Instead, MFs chose to bet on a varied set of small-cap stocks such as TTK Healthcare, Unichem Labs, Jubilant Lifescience, Suven Life Science and Vinati Organics.