What we saw on Wednesday was pretty much part and parcel of any bull market. Should the investors be worried?
Gurmeet Chadha: No, it is not even half a percent correction and I think everybody has been waiting for it. Some mean reversion will happen maybe towards large-caps as we go along. And even if you see the price action, there is a smart rotation happening in the markets especially where the earnings were weak in Q1.
In the BSE 500, the EPS growth was sub-5% and more than 240 odd stocks are around 45-50 times earnings. So, there is a bit of rotation happening. It happened towards IT when the yen carry trade started unwinding, and also a bit towards pharma and FMCG in terms of defensiveness. My sense is once we start seeing the rate cut cycle as US economic data yesterday was quite weak and it seems like the Fed is behind the curve.
Once the rate cut cycle starts, we will probably maybe see a shift towards financials and NBFCs. So, rotation is what you will see. For India in particular, the macro setup looks good. Crude price is at $73-74. The US will soon start cutting rates. The dollar index is fairly comfortable. So, despite a little bit of jitters here and there, we should be okay.
Are FMCG and pharma the pockets that will provide the best amount of safety as well as risk reward right now? FMCG because of the rural recovery and pharma because there is another important trigger lined up, the US Biosecure Act, if it goes through in the coming week?
Gurmeet Chadha: Yes, for pharma, the Biosecure Act, which goes to the Senate next week, would be a big trigger, especially for a lot of CDMO companies. They plan to make some sweeping changes to raw material API procurement from adversary and non-adversary nations.
We will see how the final draft comes out. But then we have a few companies on our radar. Syngene is one of them. Divi’s is the bellwether. It is already at Rs 5,000, recovered very smartly in the last quarter or so. And maybe a few other CDMO names. In FMCG in particular, the rural spending will pick up. We have the Maharashtra elections coming up and a lot of cash transfers, etc, have been announced by the state government. Then the festive season is coming up which is usually the best season for consumer companies. So, I agree with you partially. Pharma deserves more rather than just tactical, it’s a more strategic allocation. In the last 10, 15, 20 years, it has always outperformed Nifty 50 on the beta side. On the negative side, the beta is only 0.5-0.6, so it was half of what the market does in turmoil and it is very underrepresented, it is just 5% percent in BSE 500 which is almost equal to HDFC Bank.
So, we will see probably more weightage coming gradually. We are also looking at some of the branded generic plays like Mankind Pharma. We got a good entry point when they announced the acquisition of BSV and it gives them a very strong play in women’s healthcare, especially the fertility space which is which is a very fast-growing area.
For GIC RE, the government has come up with a floor price of Rs 395 per share that offers a 6% discount to yesterday’s market price. Currently, the stock is lower by almost 5.5%. There’s a list of the companies wherein the government has over of 90% holding and which may be the next candidate for OFS. There is a KIOCL, Punjab & Sind Bank, and LIC wherein the government holding is 96.5%. IOB over 96%. UCO Bank – above 95%, and Central Bank 93%. Is now the time for the government to cash in and perhaps more such OFSs will be seen?
Gurmeet Chadha: Their track record on OFS has been a little slow in the last couple of years, especially, since they have time and again missed divestment targets. This kind of investing can be speculative but I look at the PSUs in terms of where there is a more structural turnaround, especially for example the tier I PSU bank, great turnaround, look at SBI for example, the Yono app last quarter onboarded 38 lakhs saving accounts, their market share in debit card spends is almost 24%, on the mortgage now they are the market leader
It is the only bank that has gained market share in CASA as well as leading retail lending products but is still available at 1.3 book. Like YONO, Neobank is the best in class. At some point, Neobank can be hived off.
We are looking at some of the defence names now. There has been a healthy consolidation. We saw an order approval of almost Rs 1.5 lakh crores yesterday in terms of notification. A lot of orders are in terms of radars, in terms of combat vehicles, there are lists of items and so if one dig a little deeper, there will probably be a lot of opportunities.
Also, the 30% offset clause for foreign partners’ unutilised figure is almost Rs 50,000 crore. So a lot of lumpy orders will be coming probably in the next 12-18 months. I like that space as well. I am taking a more structural call rather than a tactical call on PSUs. In some places, there is a genuine order visibility and turnaround seen.