Growth is coming back in pharma: Nandan Chakraborty, Axis Capital

In a chat with ET Now, Nandan Chakraborty, MD-Institutional Equity Research, Axis Capital, says a combination of three factors- growth, less fear of FDA and valuations -- is bringing pharma back in game. Edited excerpts



ET Now: The companies, the usual suspects, with large exposure to the UK and the euro, are likely to suffer from Brexit fallout.

Nandan Chakraborty: On a broader level, there could be a little more capital outflows on Monday because the US fund managers did not have a chance to sell. The Euro zone did. This is, of course, subject to what these people, the central bankers do. If they decide something over the weekend and make some statements over the weekend, that could sort of allay certain fears. So on a broader level, in the short term, yes. Stock specific, auto companies and auto ancillaries, coincidently many of them with an exposure in UK and Europe, whether through assets or exports. The issue is at least one of them as also has fallen below fundamental realities. The others could see some pain still. I do not think they have fallen enough. There will be some reallocation of capital because at the end of the day, over two-three-year period.

Brexit as far as India is concerned is not the most important thing. You have other worries like monsoons in the Deccan which is rain fed. You have issues like whether the new RBI governor is going to compress this whole business of NPAs in banks, whether he will stretch it out or compress or do nothing or if it will be a status quo. So there are other worries about things like that. On the other hand, there are major benefits out of this Brexit as well. One is all commodities will fall. So it is a major benefit. Crude, etc, will fall. Number two is there could be various QEs announced, interest rates will fall worldwide. Your Fed rate hike may not happen. The negative, of course, as I mentioned is capital flows.

ET Now: What about IT companies? Can valuations correct further here?

Nandan Chakraborty: IT companies have two different roles. One is a hedge against the rupee depreciation because it is most sensitive to dollar. So when people become defensive, they move to IT which is a question of valuations, the PE. The other role is that of growth. Now because of slower growth in the world and because of cloud computing and so on, over the next two years also, the growth rate in IT is not going to suddenly start jumping up. It is only when over the next two years, US growth goes up as well as when in the post cloud computing era, there is return to the actual manual work of implementing things, I think IT will again start growing. So there is a short-term problem in IT because of that. In any case, Brexit itself I do not think makes too much of a difference. Yes there is a large exposure but it is not that euro is going to tank. It is the UK which has a much bigger problem in terms of Brexit rather than euro. So in Euro zone, the growth may be slightly slower but IT being a discretionary spend will be effected to some extent but not as much as let us say pharma. So I would in that sense hide in pharma even though the dollar sensitivity is less in pharma compared to IT. So IT will get effected somewhat but not as much as is made out to be by the percentages alone.

ET Now: I heard you mentioned in one of your remarks that IT companies and pharma companies could do well. Is pharma a call because of the business cycle or because of the valuations that they are trading at?

Nandan Chakraborty: So there are two, three things. One is the growth is now coming back. The issues that we have had with FDA specifically, we Indians have started becoming far more serious now over the last one year. So if you see the number of warnings and so on, as it has been going up in the previous time, they have sort of stabilised. So Indians are also making sure that the plants are in… and the plants in processes in the plants are in better shape. Number three is you see many of these companies are either growing more products, some of them at least, majority of them are going for better products in the US and lowering their exposure to euro in any case. So it is a combination of reasons both growth, less fear of FDA and valuations.

ET Now: We are talking about big pockets, IT, pharma, banks, what about the smaller pockets where disruption could come in and these stocks could become much larger than where they are, probably find their way into the Nifty. What is that small pocket that could become big over the course of the next two or three years?

Nandan Chakraborty: Unfortunately I cannot give you one answer. I will have to give you three. One is logistics for multiple reasons. Number two is those who will help in the power equipment emission norms, retrofitting the entire country to meet the norms. Number three is those who will help in the auto emission norms. So if you want to reduce it, it all to do with emission norms and it is do with logistics and for the current period, immediate period, because it is monsoons, I think all agri input should do well but that is a very, very short-term theme for now, agri as a theme will emerge really over the next three-four years rather than right now.

ET Now: Do you think the start has been good and thus monsoon looks okay or will you say wait until July to actually call your bets depending on the rains?

Nandan Chakraborty: I would wait for the first week of July. The reason being the start of the monsoon is important but not so important in the sense that the quantum is the real issue, worse is if you start and stop. So if you start and stop, then the seeds are sown and then they are destroyed. So what happens is your basically pulses and so on. I think that is not so much of a problem. The problem is more on rice and also the place where it rains. For example, Maharashtra, Karnatak, etc, etc, which are more of rain fed are more of an issue than if it rains in Punjab, Haryana and in the north where it is more snow fed rivers. So I would wait for at least the first week of July to see that the quantum of rain is continuous and enough. Right now saying that the deficit of rain in June is X per cent is a meaningless figure because obviously if you start late, the deficient will be more, it is a 7 per cent a day, it makes no sense. It is a weird comment. So I think July is the better time to assess that.