Investors' Focus To Shift To Value-Driven Opportunities In Healthcare Sector: InCred's Aditya Khemka

Aditya Khemka, fund manager at InCred Asset Management, provided a comprehensive outlook on the healthcare sector, highlighting a significant shift in investor interest from high-growth, low-margin sectors to value-driven opportunities.

Discussing the June quarter results, Khemka noted that while the performance of the expanded space in the current financial year exceeded expectations, this sector is one InCred avoids due to its unpredictable nature and low returns on equity. "The first quarter numbers were beyond our expectations, but we're cautious about the sustainability of these earnings," he told NDTV Profit.

He said while the next three to four quarters may show strong results, the sector will eventually normalise, potentially leading to underperformance for stocks heavily exposed to it. "Currently, peak profitability, combined with peak stock multiples, suggest a challenging outlook ahead," Khemka added.

Turning to branded generics, Khemka expressed a positive outlook due to strong top-line growth, but voiced concerns about high valuations. "We remain positive about the sector due to its solid performance. While the business model is promising, we are wary of investing at inflated prices. We will focus on finding a favourable risk-reward ratio, rather than just investing in a good business model at any cost," Khemka said.

In the API sector, Khemka observed significant volatility, with some companies reporting strong results while others did not. "API earnings can be quite lumpy, so we focus on long-term trends rather than quarterly fluctuations," he noted.

Khemka remains optimistic about the CDMO sector, identifying it as a major trend for the next decade. "We prefer investing in CDMO for innovators, which offers higher margins and more stable returns compared to the generics segment," he said, pointing to companies like Jubilant Pharma and Syngene as prime examples.

Regarding the hospitals segment, Khemka pointed out that while recent earnings were strong, many hospital stocks have become overvalued. "Valuations for major hospital stocks have become politically expensive. Larger hospital stocks are trading at 65 to 80 times operating cash flow, which is too high. We prefer stocks trading at 17 to 25 times cash flow. We prefer to invest in companies like Healthcare Global and Aster DM, where valuations remain reasonable,” he said.

Khemka highlighted diagnostics as a standout performer, with impressive volume growth and a rebound in pricing. "Diagnostics has been the biggest positive surprise, with price recovery and strong earnings growth. This is the space we are most bullish on right now," he said.

Looking ahead, Khemka highlighted potential regulatory challenges faced by the pharmaceutical industry, including domestic price controls and US FDA issues. "Regulations and import-export restrictions pose short-term challenges, but ultimately contribute to a more self-reliant industry," he said, emphasising the importance of long-term strategic planning.

When asked about his top picks in the pharmaceutical sector, Khemka named his fund's leading positions. "Currently, our top three investments are Thyrocare, Jubilant Pharma and Krishna Diagnostics," he said.