Franklin Templeton Drawn to Pharma Stocks Amid India Market Boom

(Bloomberg) -- Franklin Templeton Investments says India’s beaten-down pharmaceutical stocks are good bets in a market that has hit record highs.

The drugmakers are fixing problems flagged by U.S. regulators in a series of inspections that hit the industry recently, said Anand Radhakrishnan, who manages the equivalent of $4.4 billion in local equities. Growth will return to the sector, he said.

Valuations for an index of health-care shares touched a three-year low last month amid an industrywide selloff, bucking the surge that’s made the S&P BSE Sensex the region’s best performer this year as of Tuesday after South Korea’s Kospi gauge.

“One by one, pharma companies are clearing the manufacturing problems and valuations have definitely corrected,” Radhakrishnan said. The broader-market rally has outdone the growth in company profits and the economy, he said.

The Franklin India Prima Plus last month added to its holdings of drugmakers including Sun Pharmaceutical Industries Ltd. and Dr. Reddy’s Laboratories Ltd., data compiled by Bloomberg show. The sector accounted for 8.3 percent of the fund’s 111-billion rupee assets as of May 31, the highest exposure after banks.

Here are the highlights from Radhakrishnan’s interview with Bloomberg News:

Pharma, tech stocks are under pressure. Is this a time to buy?

“Information technology won’t be a high-growth now. It is a good defensive sector if you think markets are overvalued. Pharma companies were impacted by the U.S. FDA warnings. They are now clearing the problems. Pharma is a better structural story relative to tech because it is not wholly dependent on the U.S. or Europe. The local industry is growing.”

Why do you have a large exposure to lenders?

“More than 80 percent of our exposure is in private banks as they have not been afflicted by non-performing assets. You also get to play financial services such as insurance and asset management through their units. We’re not worried about some banks not recognizing extra. Many have moved to computerized recognition of non-performing loans. They no longer have the discretion to not recognize bad loans.”
Five non-state lenders including HDFC Bank Ltd., the most valuable, were among the top 10 holdings of Franklin Prima Plus at the end of May.

How has the earnings growth been in the companies you hold?

“Our top 100 stocks may deliver 10-12 percent earnings growth. Many of our investments are in companies reporting 10 to 20 percent profit growth. If we can do that consistently we can achieve our goals of generating outperformance.”
The Prima Plus fund has returned 21 percent annually over the past five years to beat 76 percent of its peers.

The market is at an all-time high. Does that worry you?

“The market has attracted a lot of speculative build up. Our economic growth is not as strong as the market growth suggests it to be. Similarly, profit growth needs to catch up. There has to be readjustment of prices. The market cannot always run ahead of both.”

When do you expect private investments to revive?

“We will see capital expenditure by private companies pick up in selective sectors like steel and power. The system as a whole won’t spend on capex as it did in the last decade as there is still over-capacity. While there’s a glut of cement overall, manufacturers in the northern states could still add capacity.”

How would you rate the Modi government’s performance?

“From the governance perspective, it has ticked many boxes. Economic fundamentals have definitely become stronger. The government has tried to address problems in the electricity sector and is now focused on fixing problems in the banking system. Decontrolling gasoline, diesel prices and an increase in cooking gas connections is also a positive.”

To contact the reporter on this story: Ganesh Nagarajan in Chennai at gnagarajan1@bloomberg.net.

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Ravil Shirodkar, Vivek Shankar