Want to invest in pharma & capex themes? These are the stocks to consider

“We believe that in the next leg of the rally, one of the major constituents will be the capital goods space,” says Daljeet Singh Kohli, CIO, Stockaxis.com

You used to teach me pharma and how to value drugs, how some companies were moving in the US and that they would be multibaggers. What is the story now after five years of underperformance? Where do you see the US business of some of the pharma companies going?
It is coming closer to an end now. Maybe in the next one or two quarters, we should start getting some positive news flow on the pharma side, especially from the US.

The channel checks are suggesting that the pressure on the pricing part is now reducing a lot. Most of the unviable players or smaller players are out of the business. The market has got consolidated into very few companies and people have started finding which are the molecules where they can have some competitive edge.

Accordingly, companies are now presenting themselves in that fashion which is resulting into some pricing power coming back. It is too early right now, but if this trend continues for another three-four months, we might see these companies gain pricing power in the US. So US generics, specialty products, complex products might see some positive movement and the companies which are positioned on that side, might see some benefit coming in over the next three to six months. One should keep the sector under watch.

The second part is that the valuations in the last many years have already gone down, which has taken care of all the negatives which are priced in. My understanding is most of the negatives are priced in now. Any positive trigger from here will kick start the reinvestment cycle in these stocks. So one should keep them on the watch list and start investing at some point of time in the next three-four months.

As of now, in our portfolios, we are holding two pharma stocks – Gland Pharma and Alembic, Both are a play on the US. Alembic for the last three-four years have been investing on new facilities and they have got a lot of approvals from the US. The US business will now start picking up in the next two quarters.

In the case of Gland Pharma, it is the injectables business which again is a very difficult business proposition. Not many companies are successful in that, Gland has been doing that and compliance record is very good. In between, they had some supply side issues. Those also will probably get sorted out in the next one or two quarters.

The other space which has been doing quite well of late is the entire capex theme. Whether it is auto ancillary or power ancillaries, defence names, industrials – have all been buzzing in trade. What is your top bet from the entire capital goods space?
This is a space where we are very bullish. We have a lot of ideas there in our portfolio. Out of auto ancillaries, we have Lumax in auto tech in our portfolio, Asahi India Glass is also a part of the portfolio.

Pure play capital goods L&T is part of the portfolio. ABB, Siemens, Schaeffler, Timken all of these have been our favourites at different points of time. We have been booking in and out for all these stocks. At some point, they will be in the portfolio and at another point we will book out again. But we are very bullish on this entire theme.

We believe that in the next leg of the rally, one of the major constituents will be the capital goods space. In fact, in defence, MTAR was one of our picks for 2022. In January, we gave the MTAR outlook for the year. There are lots of ideas in this space – small, mid and large — where one can have a position. This space is going to be a buzzing space for quite some time.