How worried are you about the overall coronavirus fears in terms of what could it potentially mean for businesses and for flows into India?

The repercussions of the coronavirus crisis are not yet fully known. It is still evolving. At present, we are building in a 3-5 per cent earnings cut on Nifty based on whatever we are hearing. This is post Q3 FY20 numbers. That is where we stand. Based on the final outcome, Nifty earnings projections will shape up accordingly.

Apart from the virus scare, do you think there is a possibility that the markets, and not just us but even US equity markets, which are clinging on to those record highs, may fall under their own weight?

It is very negative for global markets per se, and Indian market is also going to fall in line with global markets. But I think there could be some divergence in the broader market. The headline indices would emulate whatever is happening in global markets. If the global markets are weak, we cannot rise. As far as Nifty and Sensex are concerned, you could see divergence in the broader market per se, which is an under-owned space and there, you will have few winners here and there.

Do you sense that irrespective of what happens at an index level, the broader market recovery would stay intact and would money then tactically move out of largecaps and shift to midcaps and smallcaps?

Large ETF flows are all dominated by the largecaps. So if you have global outflows from equities, that would ultimately mean money moving out of largecaps. This is a world of passive funds, large ETF flows can swing the headline indices big time, and that is how the divergence has shaped up in the previous months. If you see, Nifty actually fell 1 per cent whereas the broader market – be it NSE100 Midcap and NSE100 Smallcap – actually gained 6 per cent last month. Of course, earnings were not that great for midcaps and smallcaps in Q3. You had more misses in midcaps and smallcaps as opposed to Nifty. Having said that, there has been a lot of outflow from this space over last two years, and some catchup in the divergence may happen. Of course, companies that have actually delivered good numbers in Q3 would see some resurgence on the upside.

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What is your outlook when it comes to the financials or any particular way that you are segmenting your picks in this space?

If we look at Q3 numbers, as far as the financials are concerned, we have seen slower credit growth, peaking out of net interest margins and aggravated slippages. That has been the case for financials for some time, and now with the slowdown persisting and with the coronavirus things coming around, you could see some heightened slippages going forward. Of course, valuations cannot expand from these levels. There is increased risk of slippages. Having said that, locally we are seeing some green shoots on credit growth and there is negative carry as far as the banks are concerned. Liquidity is ample, but a lot of that is getting parked in treasuries. Cost of funds has been higher than treasury yields, and reverse repos are thus attracting negative carry. For how long would banks be having a risk-averse opinion and continue to attract negative carry? Recent measures by RBI would mean banks are being incentivised to actually lend to certain sectors which are in distress, such as real estate, SMEs and auto, and this could be a sign of some pickup in credit growth. Having said that, I think NIMs have peaked out and there is some risk of bigger slippages going forward.

What do you make of the sudden U-turn that the USFDA has done after providing the relief to Aurobindo Pharma only on Thursday? This is turning out to be a bit of a mockery: just when you thought selective pharma prospects were getting a little better, you get a news like this, which is first in history?

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It came totally out of the blue. So the key takeaway is that the USFDA outcome is unpredictable. You cannot really be sure about what sort of diktat can come through. From what we heard on Aurobindo Pharma just a day after it was given a clean chit, it was never heard in history before. You had an OAI again coming through, which would have huge repercussion on the stock. It just goes on to highlight the unpredictability about USFDA.

Circumspect investing in pharma given this case as an example?

The pharma pack is actually doing quite well. Even in the previous quarter, we saw very strong domestic pharma growth come about, and certain segments actually grew quite well. So anti-infectives, gastro, pain management actually grew well. There is a whole lot of API opportunity coming out because of the coronavirus crisis. So companies like Divi’s, or let us say Aarti, which have a big presence in the API space and API exports, are doing well. We have also seen some very steady US sales in third quarter. We have not really seen too much of price erosion during the quarter as far as the US generic exports are concerned. That is lending a helping hand to the overall pharma pack. Companies that are having a bigger presence in the domestic pharma space are in a sweet spot. Growth is pretty steady and valuations are expanding. So pharma and IT would be the preferred picks in risk averse environments like these.

While the government is talking about a stress fund for some of the distressed telcos, how are you looking at the overall story that has panned out with the mammoth dues these companies have to shell out? Do you believe we would not really see too much of a relief coming in and the stress will continue for the likes of Vodafone and Bharti Airtel?

If the stress fund does come through, it would be a big helping hand for the telcos per se, particularly Vodafone-Idea, which is on the brink. It could be the deciding factor on whether the company can continue in business or not. Of course, that would have repercussions across the telecom space, particularly on the remaining two large incumbents, Reliance Jio and Bharti. It will have a repercussion on Arpus; it will have repercussions on subscriber addition; on revenue per minute. So I believe something like a stress fund would be helpful for telcos. The confidence in this space from the operators themselves would be something that needs to be looked at very positively.

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How bullish are you on insurance? How much of an opportunity do you see there? We have deal buzz happening in the space. Recent growth figures for the industry have been a little volatile. And regulatory hurdles are something that one has to keep in mind.


The only name which has some value left on the table would be a Max, and news flows surrounding this company are indeed positive. Having said that, whatever we heard in the Union Budget pertaining to life insurance and disincentivisation of savings have had an impact on valuations of all the major private life insurers, which were in any case richly valued. That is not to say the sector is not going to grow. It is going to grow. Of course, the volatility which we have seen in the past few months is likely to continue, but this sector is in for a long haul and large players would continue to benefit. Valuations in all private sector life insurance guys, which are listed, are rather full for the next 6 to 12 months; and earnings have been fully discounted. But there is ample value on the table in Max Life, and if you were to just value this company at 2.6 times embedded value for FY21, then any price between Rs 700 and Rs 750 is possible for this stock.





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