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Bullish on prospects of CRAMS, generic cos: Enam Securities

Published on Wed, Jun 11, 2008 at 11:12 | Source : CNBC-TV18

Updated at Wed, Jun 11, 2008 at 15:24

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Nandan Chakraborty of Enam Securities said pharma has been a defensive bet in the last few months. He is bullish on prospects of CRAMS and generic companies.

But it's very unlikely to see any more large M&A in the pharma industry, he said. And the Ranbaxy deal is not symptomatic of a wave of M&A in India.

Shifting to markets he said, he was not sanguine on the markets for the near-term and that he would be more sanguine on India if crude prices fall. He prefers FMCG, pharma for the short-term.

He advises long-term investors to start investing over the next three months.

Excerpts from CNBC-TV18's exclusive interview with Nandan Chakraborty:

Q: Not about Ranbaxy specifically but such a big deal happening in the pharmaceutical space where a global major buys up a very large company or the largest company in the space?

A: There is a lot of liquidity around, so people will make decisions to improve their returns on alternative investments as they can.

Q: Is pharmaceutical a bit top of the mind right now given the way it's performed for the first few months this year?

A: Yes because the last few months have been a strategy of being defensive. A few months back, the top defensive sector actually was IT but it has also peaked out by now. What's left is slightly smaller companies in FMCG and pharma . But with this event, even pharma is going to move up so you are not going to have too many defenses left to play. This is the worry.

Q: What is the real take on this whole large generic Indian pharmaceutical plays, are you bullish on that space at Enam or cautious on valuations?

A: We are bullish on the prospects and on the valuations. The midcap Contract Research and Manufacturing Services or CRAMS space has tremendous prospects and we are bullish on that entire space, but they also have started building defensive premium. It is going to be a short-term sort of a move from the next couple of months till things change in the Indian environment in terms of valuations.

Q: In your experience across industries, when there is usually this kind of huge buy by a larger conglomerate into an Indian company, does it lead to any sort of re-rating for the sector; is it viewed in a different way?

A: A lot of this is because of excess liquidity in the globe. This will not happen across the sector, excess liquidity will seek the best managed and the most competitive companies globally, especially when it's not available in their own countries. So, this is symptomatic of the major M&A wave across the pharma industry in India. Promoters who would like to do that offer. It's happened before in the cement industry and so on. So, they will think just sort of a mix and match in terms of fair return on capital and alternative return on capital employed.

Q: How are you gaming the market now, was it a bit of a surprise with which we plunged below January and March lows?

A: In the strategy report of last week as well in the April, we have not been very sanguine in the short-term. We are moving to more deteriorating fundamentals and we have been hijacked by different negative surprises, which were unrelated to each other.

On the other hand, from a two-year perspective absolutely bombed out sectors like PSU banks etc. are a very good entry point. Both the world in terms of oil and the Indian government; RBI in terms of the macro parameters are firefighting. The firefighting stage is usually not for the bottom of the markets. Our net oil imports to GDP ratio is among the highest in the world. I would be more sanguine about the markets if either oil falls by chance because it's speculatively moved up or if a formation of the new government is advanced. Therefore things can be tackled in a more long-term measure blaming the previous government etc. because there are lots of things to look forward to. We are moving into the worst deterioration of fundamentals. For example, interest rates, inflation both should be peaking in the next two months. Our iron ore is depreciating because that's a best shortcut to alleviating the current account deficit, which is actually inverse of what it should be.

All this will start reversing only after a point in time. Once the new government comes in, it will have to address the deficit financing, maybe through divestment or passing on cost for intensifying sectors like oil, fertilisers, food etc. It will have to give capital market incentives and have a slew of reforms in banking, infrastructure all that. Maybe the delayed effect of the Sixth Pay Commission also the caveat obviously ally management.

There is a lot to look forward to. There could be a huge jump if you take a two-year perspective because the problem in India today is not the EPS growth. The problem is the PE because of the fear of the future. You have got a twin deficit, which could be above 10%, if you calculate based on this year's estimations it should be 10% each, which is monumental. We didn't panic when the oil went up from USD 30 per barrel to USD 100 per barrel because it didn't hit fiscal deficit to that extent. Fiscal deficit and your current account deficit due to firefighting policies have reached a level where India rating is under threat.

On the other hand, for a long-term, there is so much to happen when the new government comes in. In the short-term I will remain defensive.

Q: You have said two-years down the line we will be okay. Does it mean you think it takes that long to fix the macro problems that we have in hand right now?

A: Who knows maybe there will be a new government formation towards the end of this calendar year? It is just that you discount things maybe a year ahead. Basically, oil has been speculative in its move and falls on the external front. The new government formation where they can stop firefighting, blame the previous government and do things, which they need to do.

Food prices are now quite stable, inflation will be peaking because of base effect, food. If oil continues like this you will have commodities falling also. The inflation interest rates and iron ore both could be in the opposite direction a few months from today. Which means that the inflation would fall, interest rates could at least stabilize and not rise and iron ore could start appreciating instead of depreciating, which are all positive fundamentals.

All this will happen sometime away from now. Right now, I would rather be defensive and a little bit of this pharma move that you are seeing obviously triggered by Ranbaxy is to do with the fact that how many defensive sectors are left today.

Q: So at this point, what would your top conviction buy be in terms of a sector?

A: In the short term, it would be in terms of the most defensive sectors, which is FMCG, pharma, leaving alone the top two-three players, which are overvalued. In the long term, it will be the most bombed out sectors, which is PSU banks. A good strategy is to have both under ones covered. In is the largest petrochemical, oil and gas, exploration sort of companies, those companies including the gas utilities and so on, it would be a mix of aggressive and defensives.

Q: From your strategy report in June that you are saying, if oil stays above USD 120 per barrel, will it be a good idea to hold on to a large element of cash as well in the portfolio?

A: It should be in cash now, and this is for the short-term and the long-term investor. He should start investing over the next three months. So, nobody can predict the bottom. Fundamentally, if all things are equal, which they are not right now, 14,000-15,000 on the Sensex is roughly a base level valuation. If you look at the PSU banking sector, it's absolutely bombed out, the loan waivers and all that is actually being taken care of everyday by the government and not the banks. There is a moral hazard there, but that's sort of hypothetical in a sense and things could change. Then you have the utilities, which will be the KG Basin gas, which will be coming out by the end of this year, so you have a breathing time over a year or so. The pipeline will start getting formed over the next few years, so those are relatively safer compared to the others. But things which are dependent on liquidity to grow, the large realty sectors, large engineering companies are all really post-election bets. Frankly one should sell them at this point in time and conserve cash for that.