Sun Pharma | Pharma will continue to do well; Dr Reddy’s, Sun Pharma, Cadila, Ipca top picks: Chakri Lokapriya

It was a good day yesterday. We are hoping that we will see another one today and that we somehow find stability. For now, pharma seems to stand out. We were discussing some of those stocks in great detail from a valuation point of view taking advantage of what we are seeing on the currency and PE multiples. Would you agree and if so, would you be focusing on the heavyweight names or some of the other names as well that have been showing strength; the likes of Cadila, for example?

Pharmaceutical as an industry is coming out of the FDA issues of the past and time with the coronavirus. So against this backdrop, we have a few companies like Dr Reddy’s with a very diversified basket of products and with a broad range of the US approvals, companies like Sun Pharma and Cadila will do well given that their valuations are not expensive.

In other words, they are actually quite attractive with fairly visible earnings growth, which is a rarity in current times. On the other hand, you have domestic pharmaceutical companies, largely domestic like Ipca. Again, the valuations are very attractive and growth is fairly visible and in an environment where growth is priceless, this sector will continue to do well.

What about some of the metal names? Traditionally, of course, they have been very volatile but given the global environment right now, plenty of factors seem to be pointing towards some move there?

Metals are basically very cyclical in nature and it largely depends upon economic outlook. Today you have global economies in sync facing the coronavirus and as a result, economic activity is down. If you look at commodities, if you look for demand for instance, oil in India is down about 30-40% just in the last one month; so has the demand for other commodities including metals.

Now how soon this quickly comes back depends upon two things. One, globally is there going to be some kind of a slowdown in the virus curve flattening out and in India when is it going to come? But from current estimates, it looks like it is going to be probably sometime in the first week of June when India expects a flattening out of the curve.

Now as and when that happens and if it happens as forecasted, then you can get into some kind of forecasting. Right now, forecastings are a bit too in the air and valuations are also not important for metals. Yesterday what we saw was a reflation trade on a hope or expectation that the curve is flattening out. So I would still wait it out for a positional trade. Yes, they look attractive but from an investment, you would still need to wait.

What was in store for us yesterday was a bumper day; more like a grand rally. Do you think we are likely to build on that or are we likely to consolidate?
We still do not have a trend. In turn, what is important is to see some kind of stability in new infections because businesses have come to a standstill. Also, there are talks that the government is waiting to get a package for various sectors; so the contours of that will also define the next leg of markets from here on.

Morgan Stanley believes that Reliance is a great company. They feel that even if the asset sales do not go ahead, the stock becomes a buy. Do you think after a 10% rally yesterday and given that crude prices have declined and there is going to be uncertainty on where the Aramco deal is headed, will Reliance qualify as a buy?
Yes, Reliance qualifies as a buy at current levels because all their businesses will do well or will continue to do well. Given that they have one of the most complex refineries in the world, it is just a question of maintaining the spread or having a spread better versus competition, which with its complex refineries, Reliance can afford to do.

Second, Jio is continuing to fire on all guns in terms of both subscribers as well as trying to improve its profitability and third, the retail business continues to do well. So the valuations hold up. Yes, there was a certain amount of premium attached in the past month before that in the month of February during the Aramco deal talks time.

Even for BPCL for that matter, the valuation parameters are likely to be much lower given that valuations itself for not just a sector but also for the overall market, both India and globally, has come off. So then it becomes a question of time: a question of timing that Aramco deals with; do they want to do it now or do they want to see where oil price stabilises before panning the deal.

Do you think IndusInd Bank, which is now trading at less than two times the book becomes more like a value buy or like a go to stock?
For IndusInd Bank, the next data point to watch is when RBI gives the promoters the go ahead to infuse capital. Second would be the raise of the confidence capital of roughly about $500 million to $700 million and the timeline of that. These two measures are important so that it does not lead to some kind of a crisis of confidence in terms of a run on the deposits of the bank, which is usually a precursor to the health of the bank. So the valuations are very attractive but one needs to wait on these two data points before committing further capital to IndusInd Bank.