Pharmaceutical companies are going through the remediation process and as approvals from the US Food and Drug Administration start flowing in, the stocks will perform well says Swati Kulkarni of UTI MF.
Speaking to CNBC-TV18, Kulkarni suggests looking at the sector from a 2-3 year perspective. It will take couple of quarters to get more clarity on pipeline for these companies, she says.
US generic business typically contributes 60 percent to the topline growth of the pharma companies.
Among other sectors, she bets on automobile and cement. She expects growth in auto companies on increased demand and increasing aspirational levels of people.
“We will be focusing on areas where the cash flows are strong,” she says.
From a long-term perspective, she expects domestic cyclical recovery to drive the market.
In the financial sector, retail private sector banks are at extreme end of valuations because there is growth. Retail loan growth has remained steadier in the past one year, she says.
The Union Budget this year gave affordable housing infrastructure status and Kulkarni expects the consumer finance to do well. She said due to growth, investors are rating this space ahead of rest of the pack.
She also said, as credit growth picks up there could be an opportunity in the private bank space much better than PSU banks.
Below is the verbatim transcript of Swati Kulkarni’s interview to Prashant Nair & Ekta Batra on CNBC-TV18.
Prashant: What do you see as the road ahead for pharmaceutical stocks? About two weeks back or fortnight back we saw this burst of activity enthusiasm in pharma stocks and many people pointed to those two or three days and said maybe a bottom has been made for these stocks, people are going to give them the benefit of doubt. Do you think we are at that point or do you think the gains we are seeing will be quickly fade out once again?
A: I have been maintaining a view on pharmaceuticals stocks or sector that it is – one should look at it from at least two to three years perspective because most of these companies are going through the remediation measures. As you know that barring the one or two which have passed that now there will be about two to three quarters period before they actually get these US FDA approvals without any observations and then there will be a visibility of the pipeline that would improve. For many stocks it is possible that analyst start taking these ANDAs into their calculation, so it is really a case to case basis.
But definitely, it is incrementally, I think I would say that it is a matter of time that these companies are able to get the remediation right and then hence one could have a long term view on the sector. In terms of this is as per as US generic is concerned and US generic is the major opportunity, about 60 percent of the top-line for many such companies are coming to US generics. Apart from that emerging markets and domestic markets are also looking up from a low base that we have be it because of the currency volatility or because of the country specific issues about any National List of Essential Medicines (NELM) that has also started to look up from a low base perspective created for last year. So, net-net I would say that given the valuations that have corrected and you have an improving visibility one should have two to three years view on pharmaceutical sector and be case specific.
Ekta: There seems to be a lot which is going on in the private financials space. So, besides the news on HDFC Bank which is largely technical in nature you have IndusInd Bank, YES Bank, HDFC gaining; Kotak Bank-Axis Bank both of the banks have denied rumours of a possible merger, but nonetheless that rumours seems to be still floating around. Your thoughts in terms of how one would approach this space?
A: If you see how the valuations are clearly, retail private sector banks are at the extreme end of the valuation and investors like us are still willing to give those kind of valuation multiples because there is a growth. If you dissect the growth it is coming out of mainly from a retail franchise and retail loan growth is I would say that has remained steadier in past few years. The drivers that we look forward are also in favour of the retail because we are in a way if you consider the Budget it is more of an inclusive growth and more coming from an affordable housing, so mortgage is likely to do well as also the consumer finance.
So, from that perspective, I think where the growth is the valuations are considering that growth aspect and hence rating these particular space a little ahead of the rest of the pack mainly corporate private sector banks. So, we are constructive on corporate private sector banks also because if you look at the return on equity (ROE) franchise and in terms of the improvements in the return on assets (ROA) that could some because probably you are at the bottom of as far as the credit cost are concerned that certainly as a credit growth picks up with a strong retail franchise that these corporate facing private banks have probably there could be an opportunity which could be much better than the PSU banks at this point of time.
Prashant: Any other segment of the market where you are finding some amount of comfort level, you could call it margin if safety while going in would you want to talk about that?
A: I think if you look from a slightly longer term perspective maybe two to three year. What could drive the markets is the gradual domestic cyclical recovery. From that perspective wherever there is a strong franchise be it in terms of distribution network or in terms of the overall franchise as far as the brand strength and the products are concerned. We find that sectors which are likely to benefit are for example automobiles where discretionary demand and aspiration levels are definitely going to be stronger support for the sector if you look at that kind of horizon.
Cement is also where we have been positive for some time and that is mainly coming out of the lack of import threat and the kind of incremental addition of capacity which is going to taper off and the demand has remained muted for quite some time. So, I think these are some of the drivers which could work for the economy in absence of any big bank CAPEX on the private sector as we all now that the capacity utilisation are only likely to reach 80-90 percent in next two to three years times before and then private sector would start of putting up capacities. So, we would be focusing on these areas where the cash flows are strong and the companies have the competitive franchise.