In conversation with Chirag Dagli, Fund Manager for Healthcare Fund, DSP Mutual Fund

Indian economy is on a sound footing vs global economy. By and large, India has remained insulated from hikes in global interest rates, voices Chirag Dagli, Fund Manager for Healthcare Fund, DSP Mutual Fund

On a YTD basis, healthcare stocks in India have predominantly shown strong performance. What are the main factors driving this outcome?

Over the past 3 quarters, one of the big changes in the sector is the return of growth in the US generics market for Indian players driven by factors like reducing price erosion in base business from the double digits to single digits and new launches over the last 3 quarters. Apart from supply disruptions seen in the market some large players filing for bankruptcy and a few large players seeing US FDA actions. We also feel that prices in US generics were too low in past and hence some normalization was expected. This view was also recently echoed by the US FDA commissioner.

The domestic formulations business, which is also one of the other important markets for most of our healthcare companies, has grown in early double digits allowing for strong cash flows. Importantly most players have expanded the field force of medical representatives to improve geographical reach and doctor coverage. We should see the benefits of this coming in the near future.

What is your outlook for the hospital and diagnostic sector for the next few quarters? 

Hospitals have seen a strong improvement in occupancies post-COVID. There has been an improvement in case mix and pricing improvement. Moreover, the mix of beds has improved in favour of mature beds v/s new beds thus allowing for higher margins. We see a continuation of these trends in the future which could translate into early to mid-teen growth for most players. Regulatory action could be the only dampener to the sector’s prospects. Listed hospitals did not benefit much from COVID-related business.
Unlike hospitals, listed diagnostic players benefitted from the Covid-related business. However, the non-covid business suffered. We have now seen covid business go to negligible levels while non-covid business has started to grow in early double digits. However, unlike hospitals, we see increasing competition in the diagnostics business. We have seen the return of pricing growth in Q1 FY24 but it is still early to call this a sustainable trend that could last beyond a year. Hence, we expect double-digit volume-led growth to continue in diagnostics with pricing improving at negligible levels.    

Apprehensions regarding the resurgence of inflation and the potential for interest rate hikes are emerging, both domestically and globally. Could this have a dampening effect on the near-term momentum of the Indian market? 

 Indian economy is on a sound footing v/s global economy. By and large, India has remained insulated from hikes in global interest rates. This is evident in the fact that the spread of 10-year rates in India and the US are near historic lows. A global recession could impact exports, and in turn some parts of our economy and could have some intermittent impact on markets.

In your view, how has the Q1FY24 earnings season fared? What were the hits and misses? 

Banking, NBFCs, Auto and Pharma have reported strong growth in Q1 FY24, while growth in IT services and Specialty chemicals has been disappointing. 

The price erosion within the US generic market has posed a significant challenge for Indian pharmaceutical companies. What is your outlook on market growth in this sector for the fiscal year 2024? 

FY21-23 has seen very high price erosion along with an absence of new approvals. Both these factors have decisively improved in FY24. We have seen a few big product launches by many Indian companies in complex generic products. Most companies expect to continue with the launch momentum in the US generics market and hence the outlook for the US generics market is good with high single to early double-digit growth for most companies. The exception to this are companies that are facing issues with US FDA action. One important factor to consider is that most of our companies have now started de-risking the pipeline by filing products from more than one site. This reduces the risk of delay in the launch pipeline. While this involves more cost, it leads to lower dependence on 1 or 2 sites for growth in the US.

As new technologies are embraced, the Indian healthcare industry has experienced a noteworthy rise in the quality and efficiency of its services. How do you perceive the impact of AI trends on shaping the dynamics of the healthcare sector?  

In general, the healthcare sector is the first to embrace any new technology as this improves patient outcomes. Past examples of quick adoption of new technology in imaging, gene sequencing, medical equipment and medical devices are testimony to this.  Currently, there are no use cases of generative AI disrupting either the pharmaceutical drug manufacturing business or the healthcare services business. Technology has been able to simplify the drug distribution business given the high number of SKUs involved and the large unorganised distribution sector. Retail pharmacy chains as well as online pharmacy chains are solving this issue using technology.