Speaking to CNBC-TV18 Nilesh Shah, MD of Kotak Mahindra AMC advises investors to stock up on pharma stocks over the next 6-12 months as he believes they will outperform in 3-4 years.
The US is the largest market going forward. It is a country where population is ageing and the cost of medicine is going up and India is a formidable player in the market. This is the opportunity for long-term investors,” he said.
On GST tax slabs, he said that it will bring in more efficiency, reduce logistics costs. However, there are a few contentious issues that need to be sorted out, he said.
My feeling is that market is passing through a consolidation phase because it was driven up by liquidity, he said. He also spoke about the US elections, saying that if Donald Trump wins, it will result in more fiscal spending, and rate-sensitive sectors will be under stress. In December this year, he expects the US Fed to raise rates.
He would wait and watch the IT sector as it is going through a transition phase. They are getting transformed from an application management and code writing into social media and digital.Below is the verbatim transcript of Nilesh Shah’s interview to Latha Venkatesh, Anuj Singhal & Sonia Shenoy.
Anuj: First thoughts this morning have to be on pharmaceuticals. What is happening here and what is your in house view, do you think this is a good buying opportunity or would you give it a wide berth?
A: We believe pharma is a great buying opportunity and on this channel also for last three-four months I have been saying that pharma will give you an opportunity to buy in this under performance. There are three stages in pharma sector today and there is an uncertainty added because of yesterday's events in US. One, lot of Indian pharma companies lost their US Food and Drug Administration (FDA) registration which allowed them to supply generic medicines into US exports market. We believe over next 6-12 months many of them will start getting their approval.
Second, many Indian companies have lost time to file applications for their products to export into US market. Once they get the factory approvals, they will file applications. Once a pipeline has been built market will start valuing that pipeline and third and the most important is where those applications will be approved by US FDA and they will be able to push their products into the US market. US is the largest medicine market in the world and a lot of Indian companies have made tremendous amount of profit over there.
Yes, there is uncertainty today because of yesterday's development where Department of Justice has raised concerns about pricing of generic medicines but at the end of the day US is a country where population is aging, cost of healthcare, medicine is going up. In this election Obama care, health care is a contentious issue. If they want to lower the healthcare cost they have no option but to use generic medicines and India continues to provide a formidable player in that. Even when our factories' registration were getting cancelled, their products were not getting recalled which meant that the product quality was good enough.
You are going through a phase of 'manthan' where right now probably lower prices and consequently lower valuations are giving opportunity to day traders, to short-term market and write off this sector but this is the opportunity for long term investors. It is not that tomorrow onwards pharma sector is going to go up. As I have been mentioning over the last three-four months you have about 6-12 months to accumulate these stocks. There is no way you can predict which pharma company is going to get US FDA factory approval. It is impossible to predict who will file how many applications and then it is impossible to also predict which products will get approved by US FDA.
There are multiple optionalities over here and hence you will have to build a portfolio of good quality pharma companies in large, mid and small cap space and that portfolio if you can accumulate over the next 6-12 months especially on a day like today that will give you outperformance over the next three-four years.Latha: This goods and services tax (GST) thing is it a touchstone for buying any stocks or is it general good macro news, that's all.
A: As of today from a topdown point of view GST is a good development. Apart from what it will do on taxation side, from a broad market point of view there are three benefits. One, today a lot of our companies incur fairly large logistics and distribution costs because of fragmented nature of our taxation system. There is no efficiency in distribution. We hope that with GST one nation, one market will happen and that will translate into efficiency creation, that will translate into lower logistics and distribution costs. The benefits will come over a period of time but market will definitely price that.
The second thing is related to our low tax to GDP ratio which puts us in category of African nations rather than Asian nations. GST will enable not only improved indirect tax collection but also direct tax collection as many people who will be forced to disclose their turnover will probably start paying income tax as well.
Latha: I just wanted to ask you about your own industry. Aren't you worried about the nightmare of you selling your products all over the country and having perhaps 29 sales tax registrations filing that you may have to do, Kotak Mahindra Bank, Kotak Mahindra AMC. Is there not a nightmare staring you in the face?
A: Undoubtedly there are concerns which need to be sorted out and I was going to come to the nitty-gritty of GST which is extremely critical for ease of doing business point of view. Today we have centralised registration, tomorrow we will have to do branch wise registration and that is increasing paperwork. Today we are set in one system of paying taxes, tomorrow we are moving into different sets of paying systems. If my vendor has kind of not uploaded his data or his IT system is not robust or the IT collection system of GST is not robust, it's going to cause disruption.
Globally, barring very few markets like Scandinavian countries wherever GST has been rolled out it has translated into lower GDP in the year subsequent to GST rollout because of this disruption. There are quite a few contentious issues which need to be sorted out before we actually roll out the GST. But purely from a top down point of view market will be positive about GST rollout because of lower logistics and distribution cost; because of improved fiscal balances this will be positive for the market.
Sonia: How do you see the texture of the market from now until the end of the year because we have many big events lined up? Next week is the election. If there is a Donald Trump victory as a lot of people are suggesting do you think that would be a buying opportunity or would you be cautious because that seems to be a consensus trade now?
A: My feeling is that market is passing through that consolidation phase because one, it was driven up by liquidity whereas this liquidity was driven with a hope of earnings improvement but nevertheless it was liquidity driven rally. Now we are going through that phase of consolidation where certain events will continue to impact. One, as you mentioned next week's US Presidential Election result and clearly depending upon who wins there is going to be certain factors which will benefit in certain sectors which will lose out.
Hillary Clinton is probably against pharma sector, whereas Donald Trump will result into more fiscal spending which might mean bad for the bonds and interest rates could rise and consequently rate sensitive sectors could come under trouble. But more importantly market will watch out for what do they do rather than what are they talking right now. Like in any country in US also to win election people say lot of things but post winning election they have to actually do the work.
The second thing and more important from our market point of view is the US Fed rate hike and December 15, after a gap of 10 years they raised interest rates and more importantly gave the guidance that they will raise interest rates about four times in 2016, that spooked the market and we corrected in January and February 2016. Now in December 2016 the same scenario is getting repeated. They are likely to raise interest rates in December 2016 based on fed futures rate and what guidance they give, the market today is pricing in at best two rate hikes in whole of 2017. If the guidance is more than that that is likely to cause corrections and finally the quarterly results which is going to impact the prices, will have to watch out for.
Anuj: Would you want to look at say, an Infosys or the IT pack as a whole?
A: In IT I would like to wait and watch out. Clearly there is a transition happening from application, maintenance, from infrastructure management, from code writing into the social media side, cloud computing side, digital side, consulting side, product side, gaming side, so on and so forth but let this transition get over. The good part is that most of the IT stocks have corrected from a valuation point of view. So, the downside could be limited but you want to see that movement so that you can pick up for the upside.
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