What is the real risk factor for the Reliance stock? Dipan Mehta answers

“We like to remain underweight on pharma companies. There are a few domestic focussed pharma companies like JB Chemicals and Eris Lifesciences which would perhaps offer better returns then the larger US oriented pharma companies and the only exception again disclosure here would be Sun Pharma,” says Dipan Mehta, Founder Director, Elixir Equities.

What is exciting the gas stocks? Even on Tuesday, we saw a very big move on both MGL and IGL?
First of all, volumes are coming back to normal for the gas distribution companies. They have been able to pass on the increase in gas prices as well and this is one sector where the government is trying to promote an increased use of gas because it is more environmentally friendly and more energy efficient as well.

Valuations are attractive from that point of view and there is still considerable scope to expand consumption of gas and transportation, cooking as well as industrial use and that is what is driving the volumes over there.

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Most gas companies are expanding their territory which is why I think investors are interested but per se, I would be a bit careful in gas distribution companies and gas transmission companies because of the way EV adoption is going to take place in the country, the profitability of gas companies will not start to decline. It is just that the price to earnings multiple which investors will pay will start to get compressed because as we go three, five, ten years or so in the future, EV is the way forward and that will start to impact gas volumes as well.

Are you looking positively at Narayana, Shalby, Fortis, etc?
The June quarter was very good for the hospital companies and their operations have now gone back to beyond Covid levels or so and healthcare is one spending which is going to keep on increasing as it is secular in nature, there is greater awareness and availability and that is going to drive the volumes at hospital companies.

One should have a slightly longer term view and look at investing in a few hospital companies, it is perhaps the best way to play the healthcare investment theme as well. A disclosure, we and our clients are interested in Apollo. The way they have strategised the capital allocation policy and the value which they are creating in their digital business, the digital offering is quite impressive and so I would go with that company. Of course, there are other plays as well but when you like a sector, you go for the market leader and that generally works out pretty well.

Would you look at traditional pharma businesses and not only the healthcare businesses? Some of the numbers like Laurus, Gland have not been well but it is not a representation of the big ones?
With the exception of Sun Pharma, which is clearly following a very differentiated business strategy, our view on pharma is generally negative. Gland Pharma is one of the top tier pharma companies and they are also facing competition in their key products. Companies which are focussed on the US market and get 30-40% of their revenue from the US generics, need to be avoided for the time being. They are going to keep on facing pressure over there and the new product launches do not compensate for the kind of competitive intensity which is impacting volumes and operating profit margins.

We like to remain underweight on pharma companies. There are a few domestic focussed pharma companies like JB Chemicals and Eris Lifesciences which would perhaps offer better returns then the larger US oriented pharma companies and the only exception again disclosure here would be Sun Pharma. We are following how they are scaling up their specialty products business and as that increases in size, we will see more stability in earnings and greater valuation ratios being applied to Sun Pharma stocks.

What is your thought on Reliance? While the numbers were in line, the demerger news of their financial services business failed to enthuse the market.
Yes that is right but is it an inclination into the way the management is going to start unlocking the value created in the digital business and the retail business? That is the real question because if they are eventually going to spin off these businesses and offer free shares to minority shareholders, then that is going to be a great value creation and a fantastic opportunity for retail investors.

The real risk factor in Reliance is it becoming a holding company and as the associated discount starts to creep in over there, let us wait and watch how corporate actions shape up at Reliance Industries. Businesses are doing pretty well and if you strip off the kind of export duty which they had to pay on the refined products, that division also did pretty much well.

In any case, a lot of the Reliance Industry value is being generated from digital and retail and we are seeing smooth sailing over there. So, if you invest in Reliance, I would like to remain invested but from a fresh investment perspective, I would like to look at how the management is looking at unlocking the value created in these subsidiaries.