Axis MF’s Anupam Tiwari on what to go for in pharma and chemicals sectors

What we look at in this sector is that companies should have some kind of niche or some kind of good capability that gives them a differentiation. We are not looking for something like China plus one, etc, etc. We are not sure whether that would be a very scalable proposition or not, how profitable we would be for competing with Chinese companies. It is still unclear, says Anupam Tiwari, Equity Fund Manager, Axis MF

What is your take on pharma? Would you be looking at buying into some of these counters? And if yes, which space?
Currently, we are pretty bullish on the hospital space because there we see more possibility or high probability of consistency in earnings. It is a very good unorganised to organised story in India with per capita income going up, insurance penetration going up, affordability going up and that gives us a lot of confidence on the hospital story per se.

On the other hand, if you look at generic, etc, competition is increasing a lot even in India now. Earlier, the high competitive intensity was in the US and hence ROEs were under pressure. That may continue and hence material re-rating may not be possible for these companies. So the preferred bet for us is hospitals as of now.


Of course, we will evaluate as and when the situation comes and valuations are attractive enough, but domestic focussed companies would be a better choice in our opinion.

Everybody is bullish on hospitals because everybody is buying more healthcare. But if I look at the insurance companies, especially the non-life insurance companies, they are not growing. It is quite ironical. The thesis is Indians will buy more insurance and healthcare as a sector will grow but insurance – both life and non-life – is going through an extraordinary struggle whether it is life or non-life.
The market is a very complex system. Any economy is a complex system. You cannot always create A plus B is equal to C kind of equation. To give you a perspective, in the last 20 years, maybe the infrastructure sector has seen the highest revenue per se. But there are not many companies which created a huge amount of wealth for investors.

So, if the sector is doing well and there is demand, there is revenue potential. The revenue pool is high but it does not mean that companies will create investor wealth. There might be competitive impact, there might be pricing pressure, etc, etc, but the revenue may still be growing. So that is the reason. The difference between pure insurance or a hospital is that the operating leverage for the hospital is very high, the pricing power is very high and hence sustainability or profitability is good.

Secondly, India is moving in healthcare from, semi-organised to the fully organised space and that is a better reason for us to be positive on hospitals because of lack of availability of talent for smaller hospitals. We have seen that in smaller cities, 15-20-50 bed hospitals, are not able to afford good talent, they are not able to provide a holistic 360-degree healthcare, etc. The government sector is struggling in terms of providing good healthcare. People now want to have good quality healthcare.

The Indian population is also aging. We should not forget that we are aging and that is one more reason to need more critical quality healthcare. In my opinion, that is a more compelling reason for us to be in hospitals rather than anything else.

But in your smallcap growth portfolio, you also have a lot of chemical names like Galaxy Surfactants, Fine Organic and more. What makes you bullish on these counters and what is the rationale for selecting some of these?
Chemical is a very big space globally and even in India, it is one of the oldest sectors. Some of the chemical companies are 50, 60, 70-year-old operating in India; some of the companies that we own are actually more than 30-year-old. They started 30-35 years back and then they have grown.

What we look at in this sector is that companies should have some kind of niche or some kind of good capability that gives them a differentiation. We are not looking for something like China plus one, etc, etc. We are not sure whether that would be a very scalable proposition or not, how profitable we would be for competing with Chinese companies. It is still unclear.

Of course, there would be revenue, there would be potential, there would be opportunity. But what we look for is whether there is any company which can grow on its own merit, on its own capability and it should have a global competitiveness, not just local. The companies that we own, most of them are globally competitive. They supply not just in India, but have a decent market share outside India and given their spend on R&D, given their product development history and their cost advantage, they have a very good potential for further market share gain globally and that gives us confidence to evaluate and compete in this space.