How Incred's Aditya Khemka Builds His Portfolio Of Healthcare Stocks
There are five quadrants of healthcare stocks the fund looks at—unbranded generics, branded generics, APIs/CDMO/CMO, hospitals and diagnostics.
Classifying stocks into investible categories, screening companies on qualitative and quantitative parameters, and spotting tailwinds in segment specific businesses is how Incred AMC's Aditya Khemka manages his healthcare-focused portfolio.
Incred Healthcare PMS was started in February 2021 and currently has 15-17 stocks, with a top heavy model. "Top ten positions would be about 70-75% of the portfolio," he said on the Portfolio Manager Show.
Khemka, who has worked in healthcare and pharma sectors for much of his career, said there are five quadrants of healthcare stocks the fund looks at — unbranded generics, branded generics, APIs/CDMO/CMO, hospitals and diagnostics.
"We look at branded generics, hospitals and diagnostics as branded businesses. We like this bucket because India is a brand-conscious market and evidence suggests the more the brand is accepted, the more robust its business model," he said.
On API, CMOs and CDMOs, the sector has tailwinds thanks to the 'China+ strategy' in the active pharmaceutical ingredient manufacturing segment, Khemka said. But it is volatile and the business model is concentrated revenues with few customers, he said.
"We take a prudent approach here. Buy them after bad quarters and trim positions after good ones to balance composition costs and exit price."
The unbranded generics are seen as commodity trading players. "For the past 7-8 years, the demand has been slower than supply. That has kept us from entering this segment...Its not a bucket we feel will be structurally invested for more than 5 or 10 years."
Business Classification Model
The fund divides companies into three categories — 'Great', 'Good' and 'Ugly', and follows a 10-point framework, consisting of five qualitative and five quantitative parameters on which companies are scored.
Such a framework follows elimination at the start and then choosing the investible stocks to go bottom up. "Less than 500 stocks are considered out of 6,500."
"We buy 'Great' companies at fair value so we can ride on their growth engine. Markets give you 'Good' companies often at a discount. We are not interested in 'Ugly' ones, which have corporate governance issues and are fragile business models," he said.
Bullish Bets For 2024
Explaining Incred's position for 2024, Khemka said diagnostics would be a big bet, which was neglected post-Covid. "We have a good entry point. These are businesses we can extrapolate over the next 30-40 years and the profitability has been restated to normal."
Secondly, branded generics. "Such companies do business in India and shipping costs are not that relevant to them, compared to global players," he said, noting that disruption in shipping lines in the Red Sea spurring trade concerns.
"They are taking some price increases. China supplying chemicals at a steady pace is keeping costs low. This will help expand margins," he said.
Watch the full conversation here:
