Kothari Pioneer Pharma Fund: Hold

Recommendation: Hold

Aarati Krishnan

VIEWED in the context of the broad market, investors in Kothari Pioneer Pharma Fund have seen a disappointing performance from the fund since its launch.

The 2 per cent appreciation in its NAV since launch compares unfavourably to the performance of the broad market. The BL-250 broad market index posted an absolute value gain of 39 per cent since the fund's launch. This can be traced largely to the timing of the launch, which coincided with a sharp run-up in the price earnings multiples of MNC pharmaceutical stocks.

The fund's initial bias towards MNC stocks in its portfolio has prevented it from capturing fully the upward revision in valuation that Indian pharma stocks have posted since the launch of the fund. But by enhancing the allocation to cash at the right times, the fund curbed the downside in its NAV during the more volatile phases in the pharma sector.

The fund started out with a definite bias towards MNC pharma stocks in its initial portfolio, with around 54 per cent of its portfolio allocated to MNCs and just 31 per cent in Indian pharma stocks in May 1999. But in doing so, the fund lost out on an opportunity. From mid-1999 to January 2000, Indian pharma stocks saw a dramatic upward revision in their valuations, with the BL Pharma (Indian) index netting a 137 per cent gain, while the BL Pharma (MNC) Index gained a modest 11 per cent. The fund's NAV gained 40 per cent during this phase.

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The fund responded by stepping up exposures to select Indian pharma stocks during this period. The proportion of Indian pharma stocks in the portfolio was up to 46 per cent by January 2000. Since then, the portfolio has carried a fair share of Indian pharma stocks as well. In the July 2000 portfolio, Indian pharma stocks accounted for 50 per cent of the net assets, while MNC stocks accounted for 40 per cent.

The period from January to May 2000 saw a massive sell-off in pharmaceutical stocks, as widely expected changes in the Drug Pricing Policy failed to materialise. During this period, both Indian and MNC pharma stocks suffered equally, with both the indices losing around 51 per cent in value.

The Kothari Pioneer Pharma Fund managed to weather this rout reasonably well, restricting the erosion in its NAV to 33 per cent, which was just about the fall in broad market level in this period. This appears to be partly because of the substantial cash position of 22 per cent that it held in February 2000.

The fund subsequently used the weak trends in prices of pharmaceutical stocks in the period from March to June 2000 to build exposures in some of the top rung companies. This should have helped the fund to recover, at least partly, from a badly-timed launch.

Hoechst Marion, Abbot Labs, Pfizer, Cipla, Glaxo, Novartis and German Remedies are some stocks the fund bought aggressively during this period.

In the most recent period, between May 25 and August 25, pharmaceutical stocks posted a selective recovery. However, this time round, MNC pharma stocks rebounded more sharply than the Indian counterparts. The Kothari Pioneer Pharma Fund has not benefited fully from this trend, with its NAV registering a 11 per cent gain, against a 31 per cent gain in the BL Pharma (MNC) Index and a 16 per cent gain in the BL Pharma (Indian) Index.

Despite its recent underperformance, the fund appears to hold potential for capital appreciation for existing unitholders with a three-year perspective. Encouraging first quarter performance from the first-line pharma companies, coupled, with the recent revival in market interest in select MNC pharma stocks appears to point to a recovery in the sector valuation in the medium term.

Fund manager's view: In its latest monthly report, the fund reiterates that it is ``extremely optimistic on prospects for the stocks in this sector.'' The fund holds the view that valuations of pharma stocks are ``very reasonable and more attractive compared to FMCG stocks at these levels.'' The manager states that the fund is ``confident that investors would reap the rewards of their patience.''

Fund facts: Kothari Pioneer Pharma Fund was launched in March 1999 and is an open-end fund managed by Mr. R. Sukumar. The fund charges a maximum load of 2 per cent on its NAV.