Bullish on largecap IT, pharma still expensive: Rajat Sharma, Sana Securities

In a chat with ET Now, Rajat Sharma, CEO, Sana Securities, says at some point, you will see a lot of M&A activity from overseas markets into buying some of these pharma stocks.

Edited excerpts:

If we talk about sectors in news. it cannot get bigger than pharma. What is happening here it is not that valuations are expensive. People were willing to pay Rs 1200 for a Sun Pharma. It is now at Rs 650 but somehow there just seems to be no interest when it comes to pharma majors?

I think pharma stocks are still expensive. I agree that they had fallen a lot in the last one year or so but again they remain expensive. I do believe that at some point, you will see a lot of M&A activity from overseas markets into buying some of these pharma stocks but other than that, look at the largecaps right now in the pharma space. I do not see anything that has changed so drastically that I would like to get into some of these stocks and again I am talking purely on financials pharma as a sector is something which is very complicated for me to understand the formulations, the medicines.

I do know a lot of patents are coming off shelf in the United States. There is a change of presidency. May be one reason is that there could be a lot of regulatory hurdles in the industry given the hawkish noise that the new president elect Trump is making. That could be one reason but other than that, it was always an expensive sector. Largecap pharma was trading above justifiable valuation. So maybe it is just a correction and given that market itself has corrected, pharma and cement were still expensive.

Have you looked at Sun Pharma or Clarif Life? Individually both of them were newsmakers-- Sun for the wrong reasons, Claris for the right reasons?

No, I have not looked at these stocks individually.

Here are a couple of new listings including Mandhana Retail Ventures which had a very interesting move and Rakesh Jhunjhunwala bought 12.7% stake; Nalco came out with an abysmal set of numbers and market duly punished the stock as well or for that matter midcap IT which is having a very interesting move. Anything that you studied out here?

On IT in particular, we recommended Infosys to our subscribers and clients two days back and I think when you talk of midcap IT, what is the upside that you are looking for in the next six months, eight months, a year -- 30%, 40%.
Even on a stock like Infosys, you will definitely make that kind of return. Infosys was trading at Rs 1000 a share yesterday at price earnings multiple of about Rs 16-17. For a technology company of the stature of Infosys -- it has got Rs 260,000 crore of reserves, free cash flow in excess of Rs 30,000 crore and negligible debt. Where you are getting largecap IT stocks like Infosys right now with that kind of cash position they will not only cut prices but eat into the market share of a lot of their competitors.

A lot of these midcap IT companies that you are talking about, also have this huge potential to expand. Just a couple of days back, I read a news about Infosys investing some undisclosed amount into a drone company. It is a great problem to have excess cash on your books in a time when there is so much debt on most of these companies. So why would I even look at midcap IT when I know that the best that midcap IT can make, I personally believe Infosys will make higher than that. So, largecap will make you that kind of return.

As for other stocks, I do expect some news on Steel Authority of India. That is a stock that we have recommended, we have bought. In addition to that, we have also recommended Cummins India, the power generation and transmission company. The stock has done nothing for the last two years and right now if you look at their balance sheet, again it is a zero debt company with capex taking a halt for most of these other big companies. I do expect this alternate power business to start improving its performance. On infra side, that is a company we have just recommended.

What did you do with cement?

I do agree a lot of these stocks have corrected and I am looking at a lot of these stocks. Two things that stand out is each of the stocks. Each of these stocks has corrected exactly in proportion to how much overvalued it was. Now you may remember, in the last two quarters cement had continuously been outperforming and not for no reason. The cement companies had been posting some very strong numbers. What built into the cement and I have to make a disclosure that ACC is a stock I have in my portfolio but that is about it. What happened was a lot of expectations got built into the fact that with a lot of this money coming back, whether the government gets that special dividend or higher tax collections. a lot of the infra projects will kick start.

Now clearly that is going to take a while with all the money having come back. Earlier today, we were listening to the revenue secretary who by his own admission said we need some time after 31st of December to realise exactly what has happened and how much money has come back. So it is going to take a while before that cycle to kick start.

Personally I believe if these stocks correct anymore like UltraTech, if somebody’s view is one year and stuff I do believe they are offering very good value. They have fallen a lot. The technical analyst may say it is a falling knife and could fall further from here. But I would buy it. I have not really made up my mind whether I am going to do that on Monday but that is something to think about this weekend .

Cement does look very attractive. Barring the fourth quarter, I do expect numbers to keep looking very nice but yes there could be some slowdown following demonetisation and the fact that infra projects could possibly be pushed further away from where we are.

One more thing that I may add is I have looked at cement very closely at one point in the past. From what I remember, about 64% of cement consumption happens in personal house building in villages and it is for personal consumption of people. So the current pie is only 17% towards infra projects. The hope was that at 17% that bit of the pie will expand road construction or new infra projects. Clearly with the way the demonetisation has gone, the market is kind of realising it is not going to happen in a hurry.