Will China border tension benefit Indian pharma & specialty chem stocks?

The US Fed is going to drive the equity markets globally and I think it is headed higher, says Girish Pai, Head - Institutional Equities, Nirmal Bang.

Markets are looking for a reason to correct. Will the fear of a second wave of coronavirus be the big reason?
If you step back and look at the entire picture since April of this year, it has been largely led by the US equity markets and by the US Fed action in terms of bringing down rates to almost zero and the other unconventional monetary policies it has taken up. There has also been a fairly strong action from the US government’s side in terms of supporting its citizens. So the market in the US seems to be building in a V-shaped recovery in the economy; maybe not by the fourth quarter of 2020 but at least by the first half of 2021 going by what we are seeing in terms of near term data points.

So if that is the overall framework you are working with, it would not be so good to actually work against the Fed. I think you need to work along the Fed when you are kind of investing right now. I think the risk appetite is back. You could probably see some small corrections on the way because of news flow on coronavirus and India-China geopolitical tension but my sense is the overall direction seems to be up. We may probably lag the US from a return perspective. But yes, there could be some corrections on the way but from a six months’ perspective, my sense is that the US Fed is going to drive the equity markets globally and I think it is headed higher.

There is a reason why a stock like Bharti is going higher. But given that Bharti still has an AGR overhang and there is a disruptive element which is coming from Reliance Jio, is one better off in investing in telecom via Reliance rather than Bharti?
While we do not cover the space on an official basis, I can probably comment that the Indian opportunity on the telecom side is really large, especially just beyond telecom. Looking at the other parts which Jio is addressing; retail, media, those kinds of opportunities. It is a fairly large opportunity and the reason why some of these large investors are investing in Jio is probably looking at that and probably the last large opportunity available in the world.

I would say Bharti could potentially be in the other vehicle which is out there. So we have heard news flow regarding potential investors like Google into Bharti from various sides. So I would say that Bharti could potentially remain the pure play telecom story. We still do not have a pure play telecom story that one is building in Jio. It is still part of the overall conglomerate Reliance. So right now I think if you want to play the pure telecom story, Bharti is the only one. The ARPUs are headed higher even from where they are right now. So to that extent I want to be in few sectors where there is a bullish bias from an earnings perspective in the market because I do not think besides pharma and may be to some extent some consumer names, there are too many other sectors where you are actually seeing positive earnings trajectory or even stable earnings trajectory.

Do you think this entire scuffle with China could be advantageous for specialty chemicals and pharmaceuticals?
Not in the immediate term. We are dependent on a lot of raw materials from the Chinese market, especially APIs. So I do not think we can shift a supply chain and get some domestic players to deliver these raw materials in the very near term. It may probably be a little negative from a supply chain standpoint for the domestic pharma companies especially if things worsen from here and are not able to import things from China. So I may be a little worried whether some of the companies can deliver products on their way into the Indian and the US market and other developed markets. If we move to India, it is probably going to take a while, probably a few years for us to get that in order. So I may be a little worried on that side.

I think we will be watching out for Brigade’s numbers. The stock was also moving higher in anticipation. Do you think there is also a case perhaps for a recovery coming in a little faster for some of these regional players versus those that are located in the major metros like Delhi and Mumbai given the current news around Covid?
I would probably recommend some of the commercial and retail real estate players. I think Prestige would be one; maybe even Brigade to some extent. Phoenix Mills was one of our favourites pre-Covid but since Covid we have had a situation where we have had the tenets of some of these small operators coming out and saying that they are going to enforce force majeure and are going to ask for waivers during the phase of the lockdown. And also, we have had this whole wave of work from home from the IT services and even other corporate coming through which would mean that from a medium term standpoint, it could mean the demand for commercial and retail real estate is going to be under a little bit of pressure.

So right now real estate is not the space we are looking at investing in. There is probably going to be a recovery that is going to happen, probably that recovery is a lot more long term in our view; probably it is a five-year kind of a recovery.

I think at least in the housing side, there has been a lot of inventory out there which has not been absorbed because of the low demand. I think there could be an inventory build up on the commercial and retail side which one needs to worry about. So real estate is an area we would currently avoid until we get a lot of clarity on how some of these moving parts are going to move.