FY21 will turn out to be the first year of healthy earnings growth for our Pharma universe. More importantly, some of the fundamental factors which were constraining the earnings of Pharma sector e.g. US price erosion, are now in the base, Gautam Duggad, Head of Research, Institutional Equities, Motilal Oswal Financial Services Ltd, said in an interview with Moneycontrol’s Kshitij Anand.
Edited excerpts:Q) FM meet with bankers suggest that govt also wants the economic activity to pick up as soon as possible. Do you also see another stimulus coming from the govt to lift the economy?
A) Yes, we do expect another round of stimulus though the quantum and timing of the same remain unclear as of now.
It will be desirable to have a fiscal stimulus that puts direct cash in the hands of lower strata of the population and at the same time provides a catalyst to general consumption and investment demand.
The multiplier effect of consumption is the much-needed boost that the economy requires today.Q) The way markets are reacting to bad news it does seem like that the worst is over? But, can we say that the worst is over amid the COVID pandemic?
A) The Markets and economy can often be de-lined in the short term. Right now markets are looking beyond the near-term COVID pandemic impact.
At the same time, benign global liquidity and lower interest rates are acting as a catalyst for global markets and in-turn the Indian markets too. If the second wave of COVID doesn’t hit us and necessitate another round of stringent lockdown measures, then one can indeed say the worst is over.
However, the recovery path from hereon will be gradual and a function of quantum and timing of the direct fiscal stimulus that the government can provide, in our view.Q) The biggest driver of the equity rally is US markets? Some experts on D-Street feel that there could be some correction post US elections, and the same could flow down to emerging markets like India. What are your views?
A) It is tough to predict the short term direction of markets even in the best of times. Trying to predict the direction of markets basis an outcome of an election and that too during the pandemic, is infinitely hard.
However, post- US elections, it is indeed possible that emerging markets may in the short term take their cues from US markets.
We will be far more concerned about the direction of underlying demand recovery and corporate earnings in India as we believe, in the long term the equity markets indeed converge with the corporate earnings growth.Q) FIIs seem to be going all-in towards Indian markets which is a positive sign for now. But, is that to do with near-zero interest rates across the globe, or we are genuinely looking attractive?
A) Yes, the inflows from FIIs have been solid. In-fact, the Aug’20 FII inflow at US$ 6.1bn is the highest for a month in a decade.
It has to do with the prevailing deluge of global liquidity, the lower interest rates which is prompting the global FM’s to look for better yields in emerging markets.
As far as the attractiveness of Indian equities is concerned, yes it does look attractive from a long term perspective. However, the earnings delivery in the last decade has not lived up to the expectations, and to that extent, has been a disappointment.Q) There is a lot of chatter around the Dollar index which is likely to go down. How will that impact emerging markets like India? If Trump wins the election do you see a strong dollar and how that impacts equity markets?
A) If the US$ goes down, in general, it helps the emerging equity markets and India. A strong dollar is typically not positive of emerging market equities.
However, predicting an election outcome and then basis that the currency outcome and overlay that with its impact on equity markets is a tough exercise.Q) In terms of sectors – what is your call on the telecom sector as well as the metal sector?
A) Telecom: We maintain our bullish view on this sector and have a double Over-Weight position on Bharti Airtel for almost two years now in our model portfolio. Rising ARPUs and Balance-sheet deleveraging augurs well for Bharti and Jio both.
Continue market share gains in subscriber addition and benefit of digital transformation accelerated by the COVID disruption also act as a positive catalysts for the Telecom sector.
Metals: It’s a global cyclical sector where one needs to be opportunistic in entry and exits. We believe there are better structural opportunities available in India for good compounding returns over the long term. Having said that, in Metals, our preferred ideas are Hindalco and JSPL.Q) What is your call on the pharma? Do you think that the rally has already played out – Nifty Pharma is up 40% in 2020? What are your top bets in the pharma space?
A) The pharmaceutical sector has started performing after four years of consolidation/correction. MOSL Pharma universe earnings have stayed stagnant at INR 200bn between FY15-FY20.
FY21 will turn out to be the first year of healthy earnings growth for our Pharma universe. More importantly, some of the fundamental factors which were constraining the earnings of the Pharma sector e.g. US price erosion, are now in the base.
Buoyancy in API business coupled with cost reduction initiatives have aided the beat in earnings and consequently driven healthy double-digit earnings upgrade post the 1QFY21 results. We like Divis Labs, Lupin, and IPCA Laboratories in the Pharma space.Disclaimer:
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