Comparing Sector Performance: Nifty Pharma vs. Nifty Infra

In the ever-changing landscape of stock exchanges, sector indices serve as simple approximations of the relative performance of various industries. The case of the stock markets in India is not different. For this reason, the National Stock Exchange (NSE) has introduced many sector definitions for ease of monitoring of the market. Two well-used sectoral indices which most analysts and investors constantly compare are Nifty Pharma and Nifty Infra. 

Both include stocks from the Nifty 500 and are critical sectors of the Indian economy representing the healthcare and infrastructure industry. The former brings some safety in times of market crisis, while the latter mirrors the ambitions of the country's growth over time. This article discusses how Nifty Pharma has performed relative to Nifty Infra in terms of historical returns, volatility, growth factors, and insights for investors looking to spread their risk through the two sectors.

Historical Performance of Nifty Pharma

Emerging market economies, like India, have low historical correlations with Nifty Pharma, which has typically been a safe index in most turbulent times. Since healthcare is one industry with constant demand for medicines and services, it usually outperforms even when the market struggles.

During the COVID-19 pandemic, Nifty Pharma performed well and generated robust returns due to an increased demand for healthcare products. This index was at its peak between May and August 2020 due to the increased attention and demand for the pharmaceutical and healthcare industry.

On average, the Pharma sector has been characterised by reasonable risk-adjusted returns in the long run. For instance, the average CAGR of the Nifty Pharma index is driven mostly by growth in income generation and the strong markets, particularly for exports towards the US and Europe.

Historical Performance of Nifty Infra

As opposed to others, the Nifty Infra index is impacted by India's progress in the economy. It is mainly focused on the investments done for power, roads, airports, and telecommunications, as these are the sectors ridden with huge infrastructure requirements.

In recent years, the Nifty Infra index has been characterised by extreme volatility due to its over-exposure to government-linked sectors, infrastructure projects, and business cycles. It is important to note that over the last decade, the returns delivered by the Nifty Infrastructure index over a shorter period have especially been attractive in periods of economic upturns.

Key Growth Drivers

The following factors influence Nifty Pharma's growth: 

• Ageing Population: As the elderly population of the world increases, the demand for healthcare and medicines is also expected to increase.
• Innovation and R&D: The sector enjoys in‐country innovation in surgical and drug technologies, biosimilars and generics.
• Export Opportunities: The pharmaceutical market in India exports to the US, Africa, and Europe, where Indian companies are overtaking other suppliers.

The following factors influence Nifty Infra's growth:

• Government Initiatives: The key programs that steer the sector include the Bharatmala Project and Smart Cities Mission.
• Foreign Direct Investment (FDI): This sector is still experiencing a massive inflow of foreign direct investment with its new projects and expansion.
• Urbanisation and Industrial Growth: More cities are being built, and more industries are being established. Therefore, the need for various infrastructures like roads, utilities and housing is increasing.

Volatility and Risks

In general, Nifty Pharma is perceived as the least risky as the demand for healthcare products is relatively steady. On the flip side, loss of patent exclusivity, regulatory obstacles, and competitive pricing sometimes cause temporary interruptions. In contrast, Nifty Infra is more susceptible to fluctuations due to its sensitivity to the political environment and government policies, as well as the levels of regulatory approvals and interest rates.

Conclusion

Nifty Pharma and Nifty Infra both have their strengths and areas that need improvement. Nifty Pharma has a low-risk level and is regarded as a defensive sector within the stock market. It provides consistency, whereas Nifty Infra has high growth potential in up cycles of the economy. Investors should use tools like the Research 360 stock screener app from Motilal Oswal before deciding which sector to invest in.