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In mid-January, Nifty and largecap indices hit lifetime highs and since then for about a month, the market has remained rangebound. In between we had the Budget scare, which got fully recouped subsequently with the digestion of the Budget. Results season was there. Just towards the end of all these things were the whole coronavirus-related disturbances. Its impact seems to be becoming the talk of the market and that is something that has dominated the correction in the last two days of the week. This in my view has resulted in the market not being able to remain in a continuous upward movement. It should not remain in that mode also because in that case, the valuations tend to go out of the buying zone.
We saw what happened to retail stocks this week. what is your view on it? Do you think the market is getting polarised? Is there extreme faith in names such as DMart, Trent, and that is why the valuations are the way they are?
In order to answer this question, we will have to actually travel across the last two years. A lot has been happening on macro and micro fronts. If at all I want to put a starting trigger I will put it at the IL&FS issue, which resulted in the whole NBFC crisis and some of the banks’ asset qualities coming under pressure. There was a liquidity squeeze, some of them were not able to raise money and as a result, a lot of them had to reduce lending.
Then over a period a lot more NPAs came out for the whole banking system, which was from across the spectrum of industries, be it paper, housing, telecom and things like that. Then the concerns started to move towards corporate governance in some of the cases. Along with that, the macroeconomy has been undergoing a slowdown, GDP growth rate has been continuously coming down. Of course, the CPI has been raising its head and IIP number continues to remain negative.
In all these things, what happened is that the investment universe for a high-quality conscious investor has been shrinking and not only from the point of view of the quality consciousness. It is shrinking from the point of view that if you want to invest in sectors or companies on which the variables affecting the performance going forward will be lesser compared to the variables affecting some other sectors, then those options have also come down. Put these two together, even at the expense of lower top-line growth if margins were maintained or if they were going up that is where the universe of investment continues to remain. The corporate governance issues, multiple asset quality issues, the slowdown issues, the top line growth not happening is acceptable, but at least the margin should remain maintained and the variables affecting it by the change of the government policies through the budget and overall slowdown should remain lesser and that was the investment universe. And a quality conscious investor for the time being kept the valuation on the back burner. He is not at all worried about the valuation. He is just saying that I want some quality companies with lesser variables affecting it and as little impact of the slowdown as possible and that is why more money is coming into the same stocks.
What will be your perspective on some of these pharma names? Some of the midcap pharma names have done very well?
Midcaps are the ones that have started to move up, and largecaps are still not participating other than Dr. Reddy’s. To make my point clear let me give some more examples. I will be taking some names, which are not investment recommendations.
If we look at almost all the largecap pharma names, they are still not there anywhere. We have Sun Pharma, which has given negative returns on a five-year basis. Similarly, this is the case with Lupin, Wockhardt and a few others. Even Dr. Reddy’s for a five-year basis has not given any significant return. On a one year basis, although, the stock is at 52-week high.
At the same time, the midcap pack seems to have completely differentiated. Divi’s Lab, with the disclosure that I do hold some shares, has been doing very well. Torrent Pharma, Natco and Alkem Laboratories all have started to do very well.
Separately, some of the MNCs are doing well and that is how the whole space has got segregated in three different pockets. As a generalised view, it is very difficult to take a call because largecaps are the ones which have to support the sector. Not only the domestic, but even in the export market these companies are facing challenges. One must look at individual stocks in the sector and certainly not a generalised view can be taken at this point in time.
What are your top picks?
With the results season over, the next trigger that the market has started to focus on is the impact of coronavirus. Given that any sectors related to international trade and imports from China are the ones, which market will probably not like, the focus will shift back to buying in domestic sectors, which include BFSI, private banks, NBFCs, cement, consumer goods, fast-moving non-durables and paints will also benefit from the reduced oil prices. Investors will focus on these sectors.
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