Pharma would outstrip FMCG in next 2 years by a significant margin: Andrew Holland

We are looking at more domestic plays in the second half of 2021 when you can start nibbling away when you get days like today, says the CEO, Avendus Capital.

Where do you think we are headed given the various factors we are tracking both globally as well as right here back home?
We have followed global markets all the way up because of liquidity, no doubt we will follow them on the way down. The concerns in the very short to medium term are obviously the US elections coming up and it is not whether you think Biden or Trump will win or what their policies are, a lot of the swing states have those posted ballots and it could be days or weeks before you actually know who the president might be and then it could well be contested. The market will get concerned over this at the moment.

The second thing is that markets will start to be concerned about the kind of growth that we are seeing. Most of the good news is now in the rear view mirror and I have just been noticing that Europe PMI figures are a little bit below expectations and this is backing contraction. This kind of stop start of the economies in Europe is not going to help and therefore the best might be behind us in terms of the recent recovery and therefore markets will take that risk off the table.

But when you take the risk off the table, you go back to safer havens in terms of the dollar and therefore those flows to India we have been seeing will quickly dry up or we will see some outflows from foreign investors and that will take the shine of the market. In particular, it will be the small and midcaps which should bear the brunt of the falls which we have been seeing but given some of the rises that we have seen across the board, no matter which stock it was, that is where the pain could be a little bit more acute.

It is interesting because this is just when we had started seeing momentum building across broader markets and already it is looking a little dicey. Some pockets within the broader markets like agri commodities, speciality chemicals have ridden the momentum over the last few months. Will they still be relatively insulated and the growth story remain intact there?
In speciality chemicals, the growth story is intact and it is a long term growth story. But the prices have moved up very significantly and some people are bound to take some profit off the table, hoping to buy back at a later stage. So these pockets will also come under selling pressure as people just take money off the table because somewhere someone is going to be losing some money and book some profits somewhere.

At the moment, the momentum has dried out to some extent. You could see that Nifty at around 10,800. But the pain below that is significant and that is what worries me in the very short term.

Lots are riding now on the expectation of what the festive season could bring. If there were to be a lull, would it take things back quite significantly particularly for a lot of consumer durables and FMCG companies in terms of earnings growth?
It will be the consumer discretionaries which we are all banking on to do very well in the festival season. The whole market is banking on this and expectations are high. Across the board, corporates are saying we are hoping for a good festival season. If it does not play up, then analysts again will have been taking out their red pens and bringing down their forecasts which they have not done for a little while as the recovery was coming through quite well. I think the festival season is not going to be that bad but I can be wrong. The expectation is far too high at the moment and that is really where one expects the market to begin to do well.

Unfortunately global factors might just prove to be spoilsport. I am not seeing people buying lots of things. Maybe they want to shop more online but the shopping malls have been virtually empty.

What do you make of the improvement that we have seen within the rural sector? Would you be very selective within autos?
You need to be very selective across the four-wheelers, two-wheeler sand the commercial vehicles and pick out the best in each of those sub-sectors. Actually, it is surprising how well the auto industry has come out of this not just in India but globally. They are kind of at pre-Covid levels in most parts of the world. Maybe people are thining about how they want to travel going forward. There are no trains in Mumbai and people are thinking of buying a second hand car or even a new car. These things have helped and will continue to help the auto industry.

There is a big change going on in terms of how we commute going forward. This is a longer term theme that will play through. Of course, overall India has been doing very well and the farmers have been doing exceptionally well, given good monsoons and everything. So this is one pocket that even if the festival season has been hiked up a little bit, is one area where I see continued growth going forward.

There has been a lot of traction with the bumper listings. Do you have any take on some of the companies that have recently listed or even the upcoming IPOs from Angel Broking, CAMs, Chemcon, etc?
They are all coming on these really aggressive valuations. But some of them are going to see long-term growth like. Not just in India, but globally, new retail investors have been entering the market. That is a very long term play on the Indian capital markets going forward. Even though the valuations are high now, they will probably be a lot reasonable two years on. Markets may be near 10,800 and the midcaps and the smallcaps may be suffering, and then some of those premiums will start to ebb off and that would take the shine off the IPO market. But we have been starved of IPOs and so it is good to get some new companies that will do well despite what we have been witnessing because of COVID.

Would you be betting on MNC stocks for the long haul?
Not just MNC stocks. Within the FMCG sector, there are some great MNC stocks but you do not necessarily have to be only in the multinational companies because there are some great Indian companies out there which will move through and garner market share.


If we just take FMCGs, the bigger will just get bigger and it is really a trade-off between who has got the faster growth and where the ratings are. You know what you are paying for that growth. The FMCG sector has now just become a place to hide in because looking back in the rear view mirror, a lot of the good gains and market share they have probably got already. If you take Hindustan Unilever with Horlicks, there is obviously a lot more they can do with that acquisition going forward in terms of margin improvement.

I am not saying that I want to be in this sector where I would have wanted to be six to nine months ago because valuations are stretched. There are sectors like pharma where the tailwinds are very strong going forward and we are going to spend more money on healthcare, preventive healthcare and everything else. The generic companies have pricing power for the first time in many-many years. That would augur well as given the cost cutting that all of these companies have done over the past two to three years will mean that any increase in revenues will fall through to the bottom line and your operational gearing is going to be significant.

I would rather be paying the ratings for pharma 30 times where I see a lot more growth in the next two to three years than go for FMCG at the moment. I would not necessarily say that it has to be multinationals, one needs to look at what are the growth prospects for each of the companies. But I certainly think that the pharma would outstrip FMCG in the next two years by a significant margin.

What about the Tata group? Would the latest news on Mistrys wanting to sell Tata stake news would have any meaningful impact from an investor point of view?
It has just become very messy in terms of opening up cupboards and the skeletons are falling out in terms of some of the news flow and that just does not help investors. If the stake is sold and it goes to safer hands, then the pressure on the Tata Group would evaporate overnight. So the news flow is more negative than it is positive. I do not thing it changes the fundamentals of any of the companies.

We know all the good ones and all the bad ones within the Tata Group and what they are trying to do and how they are trying to do it. I do not think it changes anything like that going forward so I think everything is known by the market but you get days like today which news flow is just going to exacerbate. The thinking obviously might be that some of the group companies might have to use some of their cash flows to help fund some of these share purchases. That is why the market is looking at it in the very short term in terms of the fact that there may be an overhang with the stock rather than anything else.

Fundamentally, we all know which companies we like and what we should do with them. So, in some of the companies particularly IT where we can see more exciting times ahead, these are good opportunities to pick up holdings.

What would still remain your top preferences?
There is nothing really new. IT and pharma are top of the list because I have explained why pharma is going to do exceptionally well over the next two to three years. IT has again an exciting period ahead of it. We speak to people in Europe. One of the fears they had when outsourcing or giving work to the IT companies was that physical nature of people coming and meeting which a lot of companies had to do.

Covid has really taken that kind of or given those companies reassurance that things can happen without any kind of physical contact and that gives them a lot more confidence to give out more and more contracts going forward. So that is the big news that I will say for the IT sector. An unfortunate situation has become a real tailwind for them going forward.

You just have to look at what the theme is going to be out there and I think one of the things that we are looking at is what is happening in China which has recovered very well compared to the rest of the world in terms of its growth. It is actually growing now. After the elections. there is probably going to be a shift towards Asian assets and China is going to be behind that. We are seeing some good figures coming out of emerging markets particularly Asia. Even though Covid started in China, the cases have not been as bad and in India we know it is bad but the death rate is quite low in comparison. So, money flows will come to Asia and India will capture quite a large slice of that.

That is the theme and if I add more themes in terms of infrastructure, which will start to see some build up from the government and corporates also will be putting money down in certain sectors, across many different sectors going forward. All this bodes well for a multiplier effect in the economy showing a strong rebound back by the end of 2021 into 2022. That is the theme I would be looking at.

We are looking at more domestic plays in the second half of 2021 when you can start nibbling away when you get days like today. All these give you a good opportunity to realign your portfolios to some of the themes shorter term and the longer term because next year is going to be very powerful in terms of flows to emerging markets and particularly India.