How PGIM India’s Rs 112 crore Healthcare Fund picks CDMO stocks to generate alpha
The fund, which delivered a 22% return over the past year, has generated alpha through a combination of concentrated stock-picking and exposure to faster-growing healthcare segments, according to Anandha Padmanabhan, senior fund manager, equities, PGIM India Mutual Fund.
PGIM India Healthcare Fund has delivered a 22% one-year return, outperforming its category and the Nifty Healthcare TRI by a wide margin. Which portfolio decisions and healthcare sub-segments contributed most to this alpha?
An investment approach combining growth-and-quality investing, a concentrated high-conviction portfolio, bottom-up stock selection and selective exposure to healthcare adjacencies are the key distinguishing aspects of PGIM India Healthcare fund.
The one-year alpha was driven by two factors: favourable sub-segment allocation and superior bottom-up stock selection. Allocation gains came from higher exposure to faster-growing pockets of healthcare such as CDMO, specialty pharma and select healthcare-services businesses, which remain under-represented in the broader healthcare benchmark.
Stock-specific gains came from owning companies with stronger earnings visibility, superior return on capital employed and differentiated capabilities.
Your portfolio appears overweight on hospitals and health insurance. With hospital chains planning around 14,500 beds and Rs 30,000-32,000 crore of capital expenditure during FY26-27, could execution delays and lower initial occupancy dilute returns on capital?Given the scale of the planned capacity addition, execution risk is an important factor to monitor. New hospitals can face construction delays, lower initial utilisation and temporary pressure on returns ratios. However, we believe these risks are manageable over a multi-year period. The inherent healthcare demand remains well supported by structural factors such as India’s under-penetrated healthcare infrastructure, rising insurance coverage, improving household income and a growing chronic-care burden.
Our stock selection focuses on hospital operators with a proven ability to generate sustainable ROCE through disciplined capital allocation, better case mix, ARPOB growth and operating efficiency. We prefer operators with strong micro-market presence, established doctor networks and a demonstrated capacity ramp-up track record. While near-term volatility is possible, better-positioned hospitals should continue to perform well over the medium term.
Hospital occupancy has remained around 60% despite strong demand, while the upcoming bed-addition cycle is significantly larger than the previous one. Are hospital valuations already discounting the capacity expansion and anticipated growth in ARPOB?
From an efficient-market hypothesis perspective, valuations in a well-covered sector such as healthcare should be assumed to reflect all publicly available information. Hospital valuations therefore already discount a fair degree of optimism around capacity expansion, occupancy ramp-up, ARPOB growth and case-mix improvement.
That said, occupancy should not be viewed in isolation. India’s healthcare infrastructure remains structurally under-penetrated, with only 1.3 beds per 1,000 people versus the global average of 2.9 (source: Manipal Health Enterprises DRHP). Combining this ground reality with rising insurance penetration, improving affordability, higher chronic disease incidence and medical tourism gives us strong visibility on long-term utilisation of quality hospital assets.
The key risk is therefore less about sector-wide overcapacity and more about absorption in specific micro-markets within a given time horizon. Also new hospitals typically open only 25-35% of capacity initially and ramp up over two to three years, limiting the risk of a sudden supply shock. We therefore focus less on headline occupancy and more on profitable capacity creation. Strong micro-market positioning, established doctor networks, specialty mix, execution track record, ARPOB trajectory and incremental ROCE matter more than industry-wide occupancy averages in our opinion.
Semaglutide’s patent expiry has attracted around 40 generic players and triggered a 70-80% reduction in prices. Where is the most sustainable investment opportunity in the GLP-1 ecosystem: formulations, APIs, contract manufacturing or distribution?
While GLP-1 formulations may represent the largest value pool, the most sustainable economics are likely to accrue to specialised manufacturing and CDMO players with peptide, fill-finish or delivery-device capabilities. Although generic semaglutide formulations could face commoditisation, established branded-generic companies should still be able to retain meaningful share in India. Branded generics account for over 90% of the IPM, and companies with deep specialist coverage, strong doctor engagement and established diabetes franchises are better placed to defend market share and profitability as competition intensifies in generic Semaglutide formulations.
Indian CRO/CDMO companies could capture nearly $4 billion of business moving away from China under the Biosecure and China-plus-one themes. How much of this opportunity is visible in actual contracts and order books, and how much remains dependent on policy execution?
The China+1 opportunity is real, but not yet fully reflected in contracted order books. India’s CRDMO market is expected to grow from US$8bn in 2025 to US$15bn by 2030, with its global share rising from 4.84% to 6.07% (Source: Aragen Life Sciences Limited DRHP). India’s 30-40% cost advantage versus the US/Europe, large FDA-approved facility base and qualified research talent strengthen its position, while rising global scrutiny of Chinese suppliers further supports the shift.
We would not treat the full US$4bn opportunity as visible today. Conversion is gradual because customers must complete audits, technology transfer, validation batches, quality checks and regulatory approvals before commercial supply. Current visibility is better in customer qualification, repeat engagement and capacity readiness than in firm China+1 contract values. Key monitorables going forward are audits converting into commercial supply, utilisation of new small-molecule and biologics capacity, and the pace of global sourcing diversification away from China.
CDMO is considered to be a very lumpy business with long cycles. What strategy do you follow in picking such stocks?
Given the above inherent characteristic of CDMO business, we focus less on quarterly earnings and more on the quality of the pipeline. We prefer companies with strong late-stage and commercial portfolios, differentiated capabilities, deep innovator relationships and disciplined capital allocation. Importantly, we build a diversified basket of such CDMO companies rather than relying on a single name. This reduces project-specific volatility risk to overall portfolio performance while allowing us to participate in the sector’s long-term structural growth.
Diagnostics delivered the strongest FY26 profit growth among healthcare sub-segments, while organised companies still control only around 20-25% of the market. Does consolidation offer a long runway, or have valuations already priced in the shift from unorganised laboratories?
We remain positive on diagnostics space. Organised players still account for only 20-25% of the market, leaving a long consolidation runway. Preventive healthcare, chronic disease growth, quality awareness and digital/home-based testing should support sustained market-share gains for larger players. We believe that strong growth visibility, asset-light models and high return ratios should support the valuations. In our opinion, future returns should depend more on execution, market-share gains and volume growth rather than further valuation re-rating.
Domestic formulations are benefiting from chronic therapies, while export formulations face pressures such as loss of exclusivity, price erosion and regulatory risks. How are you balancing domestic and export-focused pharmaceutical companies in the portfolio?
We are underweight export formulations—primarily US generics—which is our largest relative underweight versus the BSE Healthcare Index. While exports can benefit from niche launches and product exclusivities, US generics remain cyclical due to price erosion cycles, USFDA-related facility risks, product-specific volatility and recent tariff uncertainty.
We are not structurally negative, but remain selective, focusing on companies with differentiated portfolios and capability-led growth. We see better risk-adjusted opportunities in domestic formulations, supported by chronic therapy growth, a branded-generics structure with stronger pricing power, lower capital intensity and superior return ratios.
Medical-equipment companies delivered 13% revenue growth in FY26 but an 11% decline in profit. Does this indicate structural margin pressure, or are there selective opportunities as India seeks to reduce its dependence on imported medical devices?
We would be cautious about interpreting the reported profit decline as representative of the broader medical-device industry performance. The listed universe of medical devices companies in India is relatively small, and aggregate profitability can be skewed by the performance of a handful of companies.
More importantly, the structural opportunity in this space remains intact. India continues to be heavily dependent on imported medical devices, while increasing healthcare spending, hospital expansion and a policy focus on domestic manufacturing create a long runway for import substitution. We view medical devices as a selective opportunity rather than a broad sector call. The long-term growth outlook remains attractive, and the beneficiaries are likely to be companies with differentiated technology, strong distribution and the ability to participate in India’s import-substitution journey.
After the fund’s sharp outperformance, what are the biggest risks to the healthcare thesis now—expensive valuations, regulatory intervention, US pricing pressure, hospital overcapacity or disappointment in anticipated China-plus-one opportunities?
From a portfolio perspective, risks remain manageable and well-diversified. Hospitals must absorb new capacity. Global outsourcing demand must stay healthy. Additionally, CROs and CDMOs need to convert ‘China+1’ opportunities into revenue. Conversely, US generic pricing pressure and regulatory hurdles remain persistent overhangs for export formulations. Ultimately, these risks are real but fundamentally well-spread. We are comfortable with the current risk-reward because the portfolio is aligned with long-term healthcare themes such as rising incidence of chronic ailments, improving demand for superior healthcare services, diagnostics formalisation and specialised outsourcing. Also valuation is not a sector-wise issue but needs to be assessed at a sub-segment level. We are also underweight areas where earnings depend heavily on product exclusivity or external policy outcomes. Overall, we do not see one dominant risk. The key monitorable is execution against high expectations. We remain focused on companies with strong competitive positions, predictable cash flows, high return ratios and long growth runways, which should help them manage short-term volatility better.
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