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Last Updated : Jun 07, 2013 09:35 AM IST | Source: CNBC-TV18

Tough to raise funds; buy pharma, FMCG: ChrysCapital

At Chyrscapital they like companies with large presence in domestic pharma market. They like IPCA Labs because it is a stable growth story and expect a sustainable growth of 18-20 percent growth for the long-term.

Speaking to CNBC-TV18, Gulpreet Kohli, MD, ChrysCapital says it has become challenging to raise money for India specific funds because of a deteriorating macro story and a volatile currency.

Despite this fact, a lot of strategic interest from large corporations are willing to deploy large amounts of dollars in the country, he adds. So strategically money is coming into India.

He further adds they are bullish on defensive sectors like pharma and FMCG. He is specifically bullish on IPCA Labs because it is a stable growth story and expects a sustainable growth of 18-20 percent growth for the long-term. They have currently made an investment in a company called CavinKare, he added.

They are also upbeat on KPIT Cummins which has a niche engineering services business.

Below is the verbatim transcript of his interview on CNBC-TV18

Q: First a word on how you guys are calling the second half of this year for the market and whether you see momentum coming back or some kind of correction?

A: We are fairly bullish on the market. Our view is that, it will be a selective market. One will see certain sectors do very well; sectors like healthcare, fast moving consumer goods (FMCG) but there will be certain other sectors that will be under a lot of pressure.

We see market improving but improving selectively. It is not going to be a run around all sectors because there are fundamental issues in various sectors. So our view is bullish but on certain sectors.

Q: How easy or difficult has it been to raise money for India dedicated funds though and how much of a deterrent is the currency becoming now?

A: For lot of us who has been in the market now for 15 years, it is for the first time that we had to go pitch an India story after 7-8-9 years. It is becoming a lot harder to raise India specific funds; people are looking more at fundamentals and real returns versus the India story.

Therefore, one has to virtually go and present the analysis around the funds and the returns because the macro story has being hurt very badly. Even currency has had a big effect because most money got raised in 2007-08 and even if you were neutral on market, currency has had a 20-21-22 percent effect on all dollar denominated funds. It is a worrying factor and continues to be volatile which worries a lot of foreign investors investing into India.

So, fund raising at least on the fund side has been very challenging but contrary to that, at least we see a lot of strategic interest from a lot of corporates, large corporations and who are willing to now deploy large amount of dollars in the country. Therefore that is a big positive. From a strategic perspective the money is coming into the market but from a lot of limited partners perspective one is seeing a lot more selectiveness and how they want to deploy money into the market.

Q: Let us talk about some of the sectors that you mentioned- healthcare for one – what kind of stories do you like within the pharma space because these last couple of weeks has seen some turbulence in that sector whether around earnings disappointments or stocks specific issues like Ranbaxy. What kind of stories do you like in healthcare now?

A: We like domestic consumption stories where people are penetrating the domestic market because the penetration of drugs is very low. Even if one compares China to India, India is roughly at one fourth the penetration so we like companies that have a large presence in domestic market. Especially, companies that are doing very well in tier II and tier III cities because that is where the edge is since the penetration levels are still low. We like stories which are lot more domestic oriented today.

Q: Ipca Laboratories is one of the stocks that you guys have been holding for a while. You like where that business is headed?

A: Yes. The company has done reasonably well. It is a very stable business. It has been growing between 18 to 20 percent and will continue to do that. The return on capital employed in these businesses is fantastic. It is a stable growth story and it is not a story where one will see massive growth but one can expect 18 to 20 percent growth over the next many years to come.


Q: What do you hold in FMCG currently and how do you respond to concerns about extremely high valuations for that space?

A: To give more perspective; if one looks at the index then the index is roughly trading at 17 times earnings today. If one sees the two sectors where there has been the best earnings per share (EPS) growth in the last 12 months has been FMCG and healthcare. But in FMCG’s case with EPS growth there has also been multiple expansions. So even though the index is trading at 17 times, FMCG is trading at 37 times today on a trailing 12 month basis which is roughly at 15 to 20 percent premium to where it has been historically trading at. We just made an investment in a company called CavinKare, which is a private company, it is a private company based out of Chennai which is one of the leading FMCG companies focused on hair colour and shampoos and also now entering the dairy business.

Our view is that, they are getting very strong underline growth from the rural market, and tier II and tier III cities. The company has seen very good growth in those businesses. On the dairy side, they are focusing a lot more on the branded dairy versus selling milk which is what a lot of the diary players are doing.

That is the investment we made but valuations continue to be challenging and a lot of companies whether it is the paints business, whether it is the FMCG business because we put all of that in that, have all run up a lot in the last 12 months. There has also been very good earnings growth in some of these businesses. So, some of the valuations are fairly valued and in our view these are some of the defensive stories that one can play today without taking a lot of risk around the country and decision making.

Q: You have a fairly large holding in KPIT Cummins. What attracted you to that story and what kind of growth potential do you think a company like that has?

A: It is a niche company focused on the engineering services. The company has seen very rapid growth. It has excellent management team and the IT sector is actually trading at a reasonable price. When you add all of that, it proves to be a great bet. You can buy a lot of these companies anywhere between 10-12 times earnings which according to us is very attractive. The niche side of the business helps them to compete with larger players.

Q: There have been some disappointments as well, particularly in infrastructure. You guys have held stocks like Pratibha Industries and Gammon Infra. Are you holding out there or are you beginning to lose faith?

A: We are holding out onto our investment but the big issue there is not at the company level, it is the decision making level. What has happened is that payments are delayed, orders are not coming in and working capital cycles are extended. These are low margin businesses, so when you have a lot of these things happening at the same moment and businesses make 1-2 percent net margin, it has a huge impact on working capital and also on debt positions of some of these companies.

We are hopeful that as the new Cabinet Committee on Investment (CCI) has been made a lot of these projects are now getting unleashed. However, it will still take another 12-15 months. We are long-term investors. We are holding onto all these investments.

Q: It has been a fairly insipid first half for the market. Even if you would point to sector specific performance and reasonable strength for the market what kind of upside potential would you say is present this year for the indices?

A: Our view has been that to expect anything more than 10-12 percent from here will be being too optimistic. Some of it might get improved, because if you have a good monsoon at least you will have a little bit of that positive effect.

The challenge is that there is no real catalyst at least in the near-term for the market. Therefore, to expect anything above 10-12 percent on a rupee term is hard to predict because I cannot predict where the rupee-dollar will be.

Just to give an overall example, in five years the market is below where it was in 2007-08 versus all over the world where most of the indices are actually at time highs. So, India is being looked at very differently than the other markets.

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First Published on Jun 6, 2013 02:10 pm
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