Despite the run-up, Reliance continues to be nicely balanced: Gurmeet Chadha

Gurmeet Chadha, Managing Partner, Complete Circle Consultants, says “one concern about Reliance is that the free cash flow generation will again get subdued because of the capex they are doing on both Jio as well as energy and retail businesses. I have lost count of how many acquisitions they have done in retail and that has been one concern that happened when they went aggressively. The gross debt crossed Rs 3.5 lakh crore when Jio was in the launch stages. So, maybe there will be some monetisation of the energy business post this demerger of Jio Financial.”

I am not sure whether you track Sun Pharma closely, but if you do, any sense on the numbers?
I have just been seeing it on screen. It looks good to me considering that all three geographies, which are India formulation, US and even the rest of the world, have grown. Rest of the world also is up 7%. Their speciality side is anyway picking up and there has been some better performance if you see the previous quarters with also the pricing pressure reducing. So, we will have to look at it in more detail, but optically the numbers look good. In fact, pharma in general for this quarter has more positive surprises than the negative ones.

In the overall pharma space, there are quite a few bottom-up opportunities that you must be spotting?
Absolutely. One obviously is the branded generics and play. We saw a good listing even for Mankind Pharma. Other numbers have also been pretty okay. If you see the IPM data which comes month on month, that has shown improvement. Then, there was some recovery in the CDMO, custom synthesis play.

The March export data was one of the triggers, though the results have been a mixed bag. For example, Neuland, Syngene and even Suven for example reported very good numbers. Neuland actually made a new high. They talked off two more molecules probably getting commercialised from the development space and then you had Laurus and Divi’s reporting slightly subpar numbers, but the normalisation process was better than previous quarter, but still it is way off from what we have seen during the Covid time.

This business is lumpy, this entire novel custom synthesis or in a very simple language the global pharma outsourcing, manufacturing opportunity is pretty huge and some of these companies have done very high capex. So, Laurus has done almost 2000 crores of capex. Divi’s has done in the last three years the capex they have done in probably the last 20 years and some of the results will follow, but it is a lumpy business.

We do not know when the molecule gets commercialised. So, one has to be in for a long haul and your risk tolerance has to be high. Also, the hospital segment, in my view, still looks good. I think the occupancy rates, the elective surgeries, the average revenue per occupied bed, all metrics are stacking up nicely. It is a capital intensive business that we are tracking.

But what about Reliance on Friday? That is up by a solid 3%. How are you looking at this one?
I think it was long due. It has been a while since it consolidated. I think the earnings were pretty strong. The O2C segment did pretty well while Jio continues and retail continues to get more traction. Also, I think the demerger of Jio Financial Services was another small trigger, the market was valuing it at about 200-220, the Jio Financial Services.

One concern is that the free cash flow generation will again get subdued because of the capex they are doing on both Jio as well as energy and retail businesses. I have lost count of how many acquisitions they have done in retail and that has been one concern that happened when they went aggressively. The gross debt crossed Rs 3.5 lakh crore when Jio was in the launch stages. So, maybe there will be some monetisation of the energy business post this demerger of Jio Financial.

One major catalyst the market is looking at is probably some settlement on the windfall tax side also so that you can get more clarity on the earnings. So, despite the run-up, Reliance is quite nicely balanced.

Are you as surprised and shocked by the performance of Page Industries?
Yes, I think the results were a shocker as stock prices are priced to perfection and Page has had a great track record. The IPO came at sub-300 and despite this correction, it has been a great wealth creator and that’s why we have given them 60, 70, 80 multiples. What has happened is in both inner garments as well as athleisure wear, the competitive intensity has gone up. A lot of brands have come of age.

They have enjoyed a lot of exclusivity and are very dominant in women’s innerwear. But the opportunity size is huge. The market is moving towards more premiumisation. Even the mid-market segment players like Lux, etc, are also moving in there. So, we will have to probably see whether it is just a one quarter thing or there is something more structural playing out. I will probably wait out for another one or two quarters and see how they are doing.

They are working on new segments which is athleisure, the kids segment, then they are also into Speedo which is into swimwear. So, while the market looks good, we will have to probably see if there is more competitive intensity which is impacting both top line and bottom line for them