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    As the pharma rally matures, it's time to stick to Big Daddies

    Synopsis

    "Some of the large caps in the pharma space are beginning to look very attractive."

    Nilesh Shah-Envision Cap2-1200ETMarkets.com
    Nilesh Shah, MD & CEO, Envision Capital
    Nilesh Shah, MD & CEO, Envision Capital, lays out his three big ideas -- pharmaceutical, real estate construction and infrastructure -- for investors in the current market. In this interview, he argues that as the pharma rally progresses, investors are better off sticking to big names like Cipla rather than hunting small and mid cap names. Edited excerpts from an interview.

    What is your next big idea?
    Pharma remains our top bet. It is set to sustain double-digit growth rates over a multi-year horizon. Second, we are seeing a very strong demand for homes and all businesses connected to real estate construction like tile manufacturers or wires and cables manufacturers. On a contrarian note, I think we are going to see a pick up of investment in infrastructure. Therefore, companies related to power and railways will see a very strong momentum in the next 2-3 years. These are the three big pockets of opportunities that we see.

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    Why do you like pharma and what do you like within pharma? After an average run up of 100-150 per cent from the March lows, has not the train left the station?
    Some of the large caps in the pharma space are beginning to look very attractive. For example, our top investment idea is Cipla right now and that has been our latest addition. We think that Cipla has run up from the March lows, but if you look at it over a five-year time frame, the stock has not gone anywhere. It is probably flat or may have given low single-digit returns in the best case scenario. One of the most common aftereffects of coronavirus is the damage on lungs. The company dominates the respiratory segment by a wide margin. The long term growth trajectory of Cipla is strong and sustainable.

    Investors who have been looking at small and midcaps in pharma should now look at some of the bigger names. As the rally in a sector matures, it is anyways better to be in the larger names.

    Unfortunately, Cipla does not have a formidable presence in the US, and their margins are not the best in the industry. The ethos of the company is about care and not chasing profits.
    This kind of ethos and value system is actually going to work to its advantage because the there is going to be an increasing clamour for affordable healthcare, and ensuring that quality medicines are available at affordable rates.

    Their margins have not been beaten the industry because acquisitions have dampened their overall financials. Investments in attractive markets like the United States are beginning to pay off. Those are still early days, but I believe that over the next year or two, these are things will start showing up in Cipla’s overall financials. We would be better off not only to do a plain vanilla rear view mirror driving, but look ahead and see how relevant Cipla’s investments has been over the years.

    Would you be tempted to buy this decline in IT stocks or do you think some more selling could be in store?
    The Indian IT has essentially been a story of margin recovery due to currency tailwinds, rather than a very strong demand environment. There has been a huge savings in operating cost and most of them have not done salary hikes.

    On the demand side, most of the IT companies are growing in low single digits or, at best, mid single digits. The larger IT companies are more of a play on the currency side. In context of the valuations at which they are trading at, one needs to be a little careful.

    It is better to wait and see how the environment plays out beyond 2020. Some of them have announced very aggressive buybacks which will create a downside support for those stocks. Beyond that, I think investors would probably be better off waiting before committing to the large cap IT space.

    Will you not buy cement and steel because that is where a classic value investor would say sasta ho gaya hai (it has become cheap)?
    I do not know if any of these things are truly sasta because if there is something which is terribly sasta, then it is probably a value trap. But as the demand improves, some of these companies will enjoy operating leverage which will drive margins and earnings. To that extent, I think the intrinsic value could keep on increasing over the next few quarters.



    ( Originally published on Oct 28, 2020 )
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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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