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    Pharma has strong legs to last for a long, long time: Sunil Singhania

    Synopsis

    ‘I would put pharma much higher than FMCG; they have similar cash flows but are quite cheap.’

    Sunil Singhania-1200ETMarkets.com
    If you are content with doubling your money in five-six years and that is what is called rich, then equity investment is all about it, says the Founder, Abakkus Asset Manager.

    You feel that there is a lot of fear. What is the typical time to hunt if you are a long term investor in NBFCs?
    On the NBFCs front, the fear has been justified. There have been a lot of instances in the past three-four years in India where some NBFCs have gone barely up, some NBFCs have faced tremendous pressure, some in their quest to grow 30-40% fast have entered into very risky advances. The whole sector to that extent has got painted with a little bit of more risk and more than the equity side, funding for them on the liability side has been a big question mark.

    The problems faced by mutual funds have not helped either because mutual funds were a big source of funding for NBFCs. However, having said that, good quality NBFCs should do very well going forward and there are multiple reasons for it. Most of them have gone ahead and raised capital and strengthened their balance sheets. Second, the cost of liabilities for banks have reduced quite significantly, they have still a little bit of uncertainty about lending but it is a matter of time before the liability cost for NBFCs also go down, specifically in vehicle financing. NBFCs on the commercial vehicle (CV) front have doubled in prices because people are optimistic that commercial transportation is picking up, logistics is picking up.

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    Commercial vehicle sales will do well but NBFCs are being completely ignored. I find it very very strange that pre-provisioning operating profit market cap to pre-provisioning operating profit for some of these NBFCs is at three and four, which is crazy. Technically if you remove the provisioning, they are trading at like four times their pre-provisioning operating profit and most of them have already provided for added NPAs in March quarter and June quarter and may be that will be the case even in September quarter. The concern which the Street has is what happens after the moratorium ends? I would say that once clarity comes in, these stocks have the potential of surprising on the upside. One of our top recommendations from one to two years perspective would be looking at these NBFCs.

    I do not see too many private banks in your portfolio even though private banks are underperforming. Any specific reason why no private banks including HDFC Bank, ICICI Bank or IndusInd Bank are there in your portfolio?
    In one fund we have ICICI Bank and State Bank of India. ICICI Bank is okay, State Bank of India has been a laggard. My view is that corporate banks have been punished quite a lot. They should do relatively well because the stress is more on the retail side rather than on the corporate side.

    Second, both the banks I mentioned have good subsidiaries which are adding to their value. In fact the largest PSU banks chairman came on record and said only their digital business should be valued more than the banks market cap itself so there is a lot of inherent value there. The pre-provisioning operating profit for both these banks is significantly high and compared to that, their valuations are very low. We have taken a bet on the larger banks as I believe they are the biggest beneficiaries of reduction in the liability costs. The saving rates have fallen, interest costs have fallen to 2.75% and short term FD rates are down to 4-4.5%. Once the economy bounces back, the spreads for them should be pretty decent. So those are the bets but as I said earlier, we are banking more on NBFCs, insurance, security, brokerage companies and so on.

    When it comes to pharma, would you say it is a T20 match and it is about to get over because pharma stocks are up 100%? Is it a one day match, a buy for next couple of years or are we in a test match and for the next five years pharma becomes a buy?
    I would say it is a combination of all three. Investors or traders like the T20 version so you have some companies which will give you great returns and then vanish. There are some companies which will have a good story from a three years’ perspective. In a one-dayer you start with the 6s and 4s and you consolidate in the middle overs and then you have the last high-risk-taking flurry. In India, we have global competitiveness in pharma and IT sectors.

    I would say pharma has strong legs to last for a long, long time. This consolidation which we are seeing over the last one-one and a half month, particularly in some of the larger pharma companies is a great time to consolidate and build a portfolio. There are smaller pharma companies which are in this T20 kind of a theme but some of the mid size and larger pharma companies are here for the long haul. They should definitely be looked at whenever investors get an opportunity and they are not very expensive. I would put pharma much higher than FMCG; they have similar cash flows but are quite cheap.

    If somebody wants to get rich what is the best way out?
    Frankly I do not know the definition of rich. If you mean rich in money terms and if you are looking at trading and punting to get rich, I would not advise that. If you are looking at decent double digit to mid teen kind of returns, I would say Indian equities still have the potential of doing it. The last three-four years have been a little bit of a challenge but to some extent, these last six months have recovered that underperformance. You are back to at least making as much money as you are making in fixed deposits.

    Going forward, the assumption is that we have had two-three years of really challenging economy. Now we are having some tailwinds, money is available in plenty, our foreign exchange reserves are at an all time high. China has become the villain of the world which means that sourcing from other countries into countries like India will increase. India and China having issues and that means that the government also wants to move away from importing from China and that means supporting the domestic economy. All these are in place. We need a little bit of push from the government and a little bit of luck.

    I think we are going to head to GDP growth of 6% to 7% and earnings growth upwards of 10-12% on a consistent basis. So if you are content with doubling your money in five-six years and that is what is called rich, then equity investment is all about it. If you want to get rich overnight may be you will have to go to a technical analyst or do something else.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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