Daily Voice: Time to book profits in pharma, Zomato looks overvalued, says portfolio manager

There is excitement in the pharma space, but with the Nifty Pharma index's price-to-earnings (PE) valuation multiple at 38,  the sector is fully priced for its growth outlook. Based on our scientific investing framework, we recommend taking some profits rather than increasing exposure. It might be more prudent to explore other sectors where opportunities might be more mispriced.

Is the Zomato looking undervalued?

The stock looks more than optimally priced at the current level. Comparing it to similar global players that have achieved cash break-even and are projected to have net margins of 18-19 per cent, Zomato is far from these benchmarks. To justify its current valuation, Zomato would need substantial margin improvements and extraordinary revenue growth, beyond inorganic growth. While some optimistic investors might view it as undervalued, we consider the stock to be overvalued.

Are you bullish on the rural growth theme?

Rural is a good growth theme, as the rural consumption is showing signs of picking up. However, it is such as broad theme that one can fit a large number of companies and hence one needs to focus on bottom-up analysis to identify the attractive investment opportunities. Using a Growth Vector approach one can identify fundamentally strong companies that are available at good valuations and are favourably positioned to benefit from the strong growth tailwinds that rural economy may offer.

Do you see any panic in the equity market due to US events? In addition, do you see any reason for major selling pressure?

The latest employment data and the Purchasing Managers' Index (PMI) Index reading of below 50 support a rate cut in September. While a 25 basis points (bps) cut is broadly priced in, the market will respond positively to a 50bps rate cut, though we believe this scenario is less likely. Overall, we do not see any reason for a major selloff in the US market. For the Indian market, the rupee might stay stronger as the Reserve Bank of India (RBI) could implement rate cuts at a slower pace. Looking beyond the US economic uncertainties, the rate cuts could possibly trigger flows from foreign institutional investor (FII) away from the US and into emerging markets like India.

Is it the time to stay away from smallcap and keep the portfolio largecap and largecap-midcap-focussed?

Valuations for Midcap and Smallcap indices are currently at a significant premium compared to the largecap index. However, our recent analysis across various market caps has identified 40-50 highly promising opportunities. If you are not prepared to conduct in-depth research, it is advisable to stick to largecaps. For those willing to invest time in thorough analysis, there are compelling opportunities in mid and small caps.

Do you expect massive supply to continue from promoters, new issuances and private equity issuances?

Initial public offerings (IPOs) and fresh equity issuances will likely remain abundant if the market continues to value them favourably. Secondary market investors should exercise caution and conduct thorough due diligence before committing capital. It's important to assess company fundamentals in comparison to similar firms and critically evaluate projections for high growth or margins. We advise against chasing listing gains and remain cautious about IPOs. However, this environment does create a pipeline of opportunities for long-term investors once initial excitement subsides.

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.