We Believe The Price Erosions In Pharma Sector Seems To Be Bottoming Out: Viraj Mehta

The equity markets seem to be stuck in a frustrating band at the moment. Do you foresee a breakout or a breakdown as the next major market move?

Sensex and Nifty have been stuck in a band, however small and mid cap indices have corrected substantially in last one year. It is difficult to say when and in which direction the markets will make a major move in near term, especially in the light of uncertainty surrounding Lok Sabha elections. However, we believe the markets should do well over a 3-5 year horizon. The valuations have become attractive especially in small and mid-cap space where we largely operate.

What’s your take on the pharma & healthcare sector at the moment? Earnings multiples still appear to be relatively stretched…

We believe the price erosions in pharma sector seems to be bottoming out. Though it will be difficult to colour all the pharma stocks with the same brush. We can selectively look at some pharma companies with niche offering and strong product pipeline. Diagnostics should also see multi year growth in India.

Do you think we’re in the midst of a credit bubble? With IL&FS tanking the way it did, and the recent scares about DHFL, do you think there are structural problems within the space that are only just starting to unravel?

 Over last many years NBFC’s grew assets at a frantic pace as the PSBs and corporate focussed banks were struggling with NPAs. NBFC’s filled the void that these banks created. In the process, the lending standards laxed. Further Commercial Papers became more accessible with low interest rates and NBFC’s started funding long term assets with short term funds in hope that they will be able to roll over the funds at maturity with ease. With IL&FS defaulting, liquidity froze in the system for a few months, creating a scare for NFBCs especially the ones with large asset liability mismatches. The situation seems more or less stable for now, however there might be more skeletons in the closet which only time can tell. With NPA levels of corporate banks starting to taper, these banks should start taking back some market share lost to NBFCs. This should make credit available for growth to corporates in coming years.

What would your general advice to bottom up stock pickers be at the moment?

Bottom up stock pickers should stick to their process and not be fazed by the volatility. Investors should stick to quality companies build or add positions as and when they feel valuations are attractive. Quality will be the first to rerate when this uncertainty withers out and markets gains upward momentum and also will not result in large drawdowns if markets stay choppy. Albeit, bottom up stock pickers should follow this process irrespective of market conditions.

With small caps having corrected heavily since their peak, would you say that this is a favourable time to begin accumulating shares in this segment?

Small and mid- cap indices have seen a substantial correction in last 1 year. Individual names in many cases have been battered even more. The valuations have come of substantially off the peak since last January 2018. Even though this might not be absolute bottom and volatility might continue to affect the segment, it is a good time to buy/accumulate good quality small and mid-cap companies from a 3-5 year perspective.

Lastly, please tell us a bit about the broad strategy you’re following for your PMS at the moment.

At Equirus PMS, we invest in high quality small and mid-cap companies with a 3-5 year horizon. In last 6 months, we have used the market correction to deploy our cash positions. We have been able to add positions in our new clients, as the valuations have become attractive. We have also increased allocations to existing positions and have also churned weaker positions and entered new positions based on current risk reward equation.