Pharma bottoming out but invest selectively: Emkay Global

Karwa also said that the company had tied up with DBS for equity research.Below is the verbatim transcript of Krishna Kumar Karwa’s interview to Latha Venkatesh, Anuj Singhal, and Sonia Shenoy on CNBC-TV18.Latha: How does the market look to you, at a macro level is there valuation discomfort or do you think earnings are giving you comfort? A: I think currently if you look at the market, after a decent rally of almost 10 percent on the Nifty from 8,000 to 8,800 over the last one to one and a half months, market currently are taking kind of a breather in terms of a) the result season has been good so far and trying to analyse the results. Also, the credit policy, expectations of a rate cut were there and that were not met and now the stance of Reserve Bank of India (RBI) being more towards neutral, market is kind of digesting that. So, having said that, the results season has been very decent; much better than what people were fearing and that is also getting reflected in the stock prices and the way the market has rallied. Expectations are now that we have seen the worst of demonetisation behind us; probably Q4 there could be some more impact and next year onwards things should look much better. So, on a valuation front, yes, market seems to be fairly valued, but then markets always looks at forward discounting. One quarter down the line and market would be on a much better scale. Anuj: What is the way to play this market because we have seen again leadership come back to consumption, banks while IT and pharmaceutical have underperformed, so, from here on, what would be your portfolio stance? A: Obviously if you look at the momentum, the momentum continues to be with the domestic consumption story or the domestic facing stocks. So, that is where if you are looking at earnings visibility in for the next three to four quarters, then that is a very strong opportunity even going forward. However, the question is that most of the stocks over there if you look at on a bottom-up basis, the valuation seems to be reasonably fair. So, maybe the upside potential may not be as high as you would possibly looking at. If you look at some of the sectors which have not performed well for obvious reasons, valuation seems to be in favour. So, if you look at IT or whether you look at pharmaceutical, or even for that matter maybe telecom, these are the contra sectors where maybe the valuations are in favour but the visibility of earnings may not be so good. So, I think it all depends on what kind of a mindset an investor has.If you are playing the momentum game, then you obviously need to be in the domestic consumption story or sectors like maybe in the passenger vehicles or agro-chemicals or even cement, NBFCs, private banks, etc. So, they will do well but I am sure the returns would be much more moderated. However, if you are willing to play the waiting game and slightly be more contra, then possibly IT and pharmaceutical could be the sectors which could give you better returns over a 12-18 months period. Sonia: I was going to come to the pharmaceutical space because as a house one of your top conviction ideas has been Aurobindo Pharma, and that stock in fact, that company posted a steady state of earnings this quarter. I know you won’t talk about individual stocks but just wanted to understand whether this space has come back into action for investors because it had lost some of its lustre over the past one year or so. Do you see more value here now especially in some of these bigger names? A: Certainly, if you look at it, the stocks have underperformed and for obvious reasons. There have been headwinds in the US markets in terms of consolidation of distributors, etc and pricing pressure in the generics market and also most of the companies have had issue with US FDA as far as their various plant inspections are concerned. My sense is as far as the competition or rather the pricing pressure as far as generics is concerned, what we have been given to understand is that probably it is bottoming out and the pressure is not as high as what it was maybe one quarter ago. So, that is almost done with. As far as US FDA inspections are concerned, I am sure over a period of time, issues will get resolved and on a company specific basis, you can look at it. If you look at the valuation and the return ratios that these companies enjoy, then on FY18 basis, most of the companies look very reasonably valued maybe at a discount to the market and I think that is the opportunity. Latha: You too have tied up with DBS Bank, haven’t you for research, what exactly is this tie-up?A: We have tied up with Development Bank of Singapore (DBS). This is an equity research tie-up where Emkay’s India research will be co-branded by DBS and distributed to all its institutional clients across the globe. So, this is a very prestigious tie-up for us, it is a clear cut vindication of our quality, depth, and integrity of our research and we are very enthused about the prospects for Emkay Research. Also, we will have the benefit of interacting with the strong research setup which DBS has across Asia. So, Emkay’s research will also be able to collaborate with them and be able to offer the same quality research to the domestic clients. Anuj: The fund flow situation, since you have both domestic and foreign clients, do you see this trend continuing, domestic liquidity supporting the market while foreigner stay away? A: As you know, domestic mutual fund industry has been growing phenomenally. I think last year they have grown by almost 30 percent on an overall basis. Even in the month of January, I think the domestic flows into the mutual funds have been to extent of something like Rs 14,000-15,000 crore as far as equity is concerned. I think there is a clear cut trend that household savings are getting converted into financial savings and with interest rates being where they are, the trend is decisively towards equity as a savings instrument. So, that flow will continue and our interactions with HNI, super HNIs, retail, etc. they are all struggling for fixed safe returns and everybody is willing to put money into equity. Also, I think the education that has happened over the last so many years, nobody is putting money at one stroke. They are all putting money over a decent timeframe or maybe SIPs, etc. So, that has also helped the trend. So, I think the flows will continue. As far as FII flows are concerned, they have been caught unaware in terms of the bounce back which they have seen in the Q3 results vis-à-vis what was expected , the negative impact of demonetisation. Demonetisation has not been as bad as they were expecting, so, I think they have been kind of been caught unaware. I think FII flows will also be a part of the overall flows into the emerging markets which have again turned kind of positive. So, we expect flows to be positive for India from the FIIs also. Sonia: One more space that you have been bullish on, your house has been bullish on is consumption. Within that, you have ideas like Godrej Consumer, Emami, etc, but do you think that the volume slowdown that we saw because of demonetisation has come to an end and some sense of normalcy has returned or is that verdict still not out yet? A: In terms of our interaction with the second level or the third level which is with the distributor, wholesalers, and retailers, etc. I think the feeling that we have when we interact with them, every month is a better month versus the previous month. So, obviously yes, November was a tough month, but December has improved and January has been much better. So, the sense we get is that obviously the unorganised sector has got hit and that has also helped the organised sector. Even corporates have been very accommodative as far as the challenges are concerned in terms of credit period, etc. So, overall sales are improving by the day and now with currency in circulation improving, the sense that we get is that buy March end, it will be all back to normal and you should be back on growth from the Q1 onwards.