"The 'patent cliff' is one of the key factors driving the tailwinds for Indian generic pharma players," Unmesh Sharma, Head of Institutional Equities at HDFC Securities told Moneycontrol in an interview.
Additionally, he said the thinning supply of key drugs because of the closure of the facilities of several manufacturers due to suboptimal profitability has created incremental revenue opportunities for Indian players.
Combining earnings and valuation estimates, Unmesh, who has over 19 years' experience in the capital markets, expects the Nifty to trade sideways with a mild negative bias or downside risk in FY25.
Do you expect significant opportunities in the generic pharma space?
There are several factors driving growth in the generic pharma space currently. The 'patent cliff' is one of the key factors driving tailwinds for Indian generic pharma players. Indian manufacturers have the required approvals, manufacturing facilities and supply chain in place to take advantage of the expiring patents of several products.
Additionally, short supply of key drugs because of the closure of facilities of several manufacturers due to suboptimal profitability has created incremental revenue opportunities for Indian players. Incidentally, the unit economics for Indian players is healthy for these products. This short supply has also helped in the moderation of generic drug price erosion.
In the HSIE coverage universe, Sun Pharma, Dr Reddy’s Labs, Cipla and Aurobindo Pharma are the names benefiting from the abovementioned trends.
What are your base case and bull case scenarios for the Nifty 50 for FY25?
As a house, HSIE does not have a specific target for the Nifty 50. However, we closely track valuations of the Nifty vis-à-vis its expected earnings. Currently, the index is trading at 18.2xFY26E, assuming earnings growth of 17 percent and 14 percent in FY25E and FY26E, respectively, as per consensus estimates.
In our view, earnings growth CAGR for the next two years would be closer to 13-15 percent and hence we foresee a downside risk to the consensus earnings estimates. Further, the Nifty is currently trading at a premium of ~7-8 percent to the long-term historical valuation level. Combining earnings and valuation estimates, we expect the Nifty to trade sideways with a mild negative bias or downside risk in FY25.
Are foreign investors yet to participate strongly in the manufacturing space in terms of investment? Are they waiting for the general election results?
This is quite evident from the government’s focus on the 'Atmanirbhar Bharat' theme—that the manufacturing space will witness a long-term structural growth trajectory. Hence, this would be suitable for investors with a long investing horizon. We have seen participation in themes such as EMS.
The cohort of foreign investors can be divided into two categories: those who will take a call on elections, and some macro / asset allocators who will wait for the election outcome to invest. So, we think there will be some capital sitting on the sidelines and a positive outcome in the election would lead to some inflows.
Among other sectors, manufacturing sector stocks would benefit in a staggered manner. Some companies will also attract more inflows once companies operating in some sub-sectors gain scale.
Are you betting on the consumer investment theme?
FMCG stocks have undergone a moderation in valuations in the last three quarters after a subdued performance, which makes us have a close relook at the sector. We expect consumption demand to witness a slight pickup in FY25. A normal monsoon can also support participation of the rural economy, which is only showing signs of a gradual recovery so far.
Hence, we suggest adding exposure to the sector on a selective basis. This view is reflected in our HSIE model portfolio, where we have reduced the extent of being underweight on the FMCG sector.
What do you make out of the corporate earnings announced so far?
The earnings announced so far have been mixed in nature. While the IT sector continues to avoid any optimism in its demand outlook and has disappointed more than expectations, this has fortunately been counterbalanced by results of the other heavyweight sector, banking.
Banks have delivered a strong set of numbers in this tough liquidity environment. Deposit mobilisation by the larger banks has been commendable while asset quality continues to be pristine.
Overall, there hasn’t been any significant positive surprise thrown up by the results announced so far, at the aggregate level. As highlighted in our recent strategy report (Valuation of Indices), several pockets of the market are overvalued right now and there is not much room for any significant earnings disappointment. As a result, the common theme in this results season in India (as well as globally) has been that even a minor miss in earnings is punished by large movements in the stock price.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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