Positive on Hero MotoCorp, Ipca Labs: Abhimanyu Sofat

What is that you would like to talk about at a time when it seems that coronavirus is dominating headlines? We are talking about slower growth for the global economy as well as our own; you have got the government bonds, which are expected to edge higher as well. What is the sense that you are getting with all that is happening?
So, right now this coronavirus will probably bring us to an era of quite a lot of uncertainty over the next couple of weeks. We still do not understand what is the amount of risk that we are getting into. There are going to be challenges both on the demand side as well as on the supply side and it seems to me that especially on the supply side, there could be some shocks. Just to give you an example, in Italy, the place where we have seen the outbreak of coronavirus, is quite closer to one of the largest pharma Active Pharmaceutical Ingredients (API) clusters in Europe and Italy accounts for close to 15% of the overall API for the regulated market; so that could really spook up supplies of pharma products in the regulated market and probably have an impact on the generic companies as well. In addition to that, we have seen that some of the other metals, like for example in the case of Nickel, with some coronavirus breakout happening in Indonesia, we are seeing the price being here whereas most of the other metals’ prices are coming down because that is more of a demand-led kind of a slowdown. So you are going to see disruption happening in some commodities and products because they are near coronavirus; there you are going to see an increase in terms of prices whereas from a structural level, what we clearly see is that as more news comes in, like for example there is still question mark on Tokyo Olympics; so more of that kind of news will clearly bring demand down. So we are quite circumspect about the outlook going forward because we are in kind of uncharted territory. If you recall, in 1918 you had these Spanish flu which had impacted around a quarter of the world population and it is estimated around 3-5% of the people died at that particular point of time whereas now obviously, we have better antibiotics and overall we are much equipped. But from a global trade perspective, we are significantly more connected to each other and for that reason, there is a clear possibility that stocks may continue to go down until and unless we see a clarity emerging that this particular virus can be contained.

Apart from metals, which are always the first one to go, this time there also seems to be tremendous weakness in the auto names; what are your thoughts?
Overall, you are likely to see an impact on discretionary demand over the next couple of months if this coronavirus outbreak intensifies; one hopes it does not impact India. Thankfully it has not till now, but if we do see something similar to what is happening in some other countries, then obviously there could be a drastic impact in terms of demand. Yes, a lot of stocks in the auto side have come down and the ancillary industry would especially get significantly impacted. So, assuming that we see a slowdown happening in the sector and the economy, we would like to place our bets on something like a Hero MotoCorp, which typically does okay in an economic downturn. Other than that, overall from a structural perspective, the sector looks okay but you need to look at right price points because since our view from a short-term perspective is slightly negative, we think you can get better price points to get into most of these stocks. Overall, if you look at it, probably SBI because of the issue and the sum-of-the-parts (SOTP) valuation looks quite attractive to us. And then there are select integrated players on the pharmaceutical side, for example, like Ipca Labs; those are the kind of companies that we still continue to have a positive view on despite the current weakness in the market.

The man with the Midas touch, RK Damani and his family, have increased their stake in India Cements. I am sure clients are asking you questions. What are you telling them?
Obviously they are great investors; so from a coattailing perspective, investors do tend to look at buying these stocks. So yes, it does look like there is clearly value, which is there. It’s what these investors have recognised and for that reason, we are seeing this stock doing well. I would just suggest to investors that they look at a better price point because in the current momentum, you could see the stock continuing to do very well since their stake has already reached more than 11%. So buying at very high prices would be something that investors should not do because for investors like these, they tend to look at time periods of more than five years or 10 years when they are investing whereas most of the normal investors do not have patience. When they are investing in these companies, they will not look beyond six months to one year and then they will sell the stock when it goes down. So from that perspective, recommending stocks based on someone buying is always a risky proposition.