In pharma, you always get stock specific bets: Rahul Singh, Ampersand Investment

Talking to ET Now, Rahul Singh, Managing Partner, Ampersand Investment Advisors LLP, says , in pharma, you will always find good bottom up stories despite the gloom and doom engulfing the entire sector.

Edited excerpts:


Expectations are running high ahead of Reliance’s numbers today. What is it that you are hoping to expect from the management beside the oil and gas business. Any key announcement likely from Reliance Jio’s table?

From an expectation point of view, there is not much new that we can expect because most of the numbers on Reliance Jio came out in their annual report. So analysts and investors have already formed some kind of a view. There is also a likelihood of a handset launch. We do not know whether that is something which they will announce. There are chances that it could also be announced in the AGM. So from an operational point of view, I would be looking forward to more on their projects on the oil and gas side, which is refining and petrochemical side where I do not see any major positive or negative news apart from the Reliance results.

From a market standpoint, how should one look at the stock now?

From a market standpoint, it is a range-bound stock. I do not see it leading the rally or rather leading the fall if at all there is going to be a fall. It is going to be a market performer. There is obviously some amount of stability or some sense of valuation which the market has got about R Jio and that is not going to change in a hurry till they report real numbers on Reliance Jio in the September quarter. As far as the projects are concerned, some of their projects are not as remunerative as earlier in the past when they were envisaged. That is something which will slowly percolate down to the market views. In the interim, the refining margins are stable, some of the projects will be commissioning, all in all a pretty balanced set of variables which will drive the Reliance stock. It will be a sideways or a market performer at best in the next three to six months.

It is very easy not to like telecom but big money is made when you buy something which is under-owned, unloved or less understood?

That opportunity was there six or nine months back when Bharti was at Rs 290. I do not think you can say that opportunity is there today. But having said that, the companies are coping up reasonably well at least as far as the top line is concerned. What I am hearing is that the top line this quarter may not go down as much as the market is fearing. That is some kind of a support but where they are getting hit is really on the operating cost and on the capex side.

The network operating costs are going up, the marketing costs are going up because of R Jio . So, while the top line might not decline as much, sequentially this quarter the EBITDA decline might actually be a negative surprise or will rather paint a very grim picture.

I would stay on the sidelines. Easy money has been made in Bharti. Idea is going through a huge merger process on which the regulatory approvals would be a key trigger. Once the regulatory approvals come, one should look at Idea much more carefully. So if at all, one needs to be in the sector despite these valuations, it has to be Bharti but the easy money has been made here because of the the fear about Reliance Jio launch and the impact of it on the valuations was at its peak about nine months back and not now.

What is happening in the pharma sector? Two-three months ago, everything was snowed under but now there is serious outperformance. What is the best way to approach pharma because if you are just taking a blanket bearish call on pharma you are also missing on a great opportunity?

Yes, I completely agree to that. Unlike IT where the sector level headwinds take everything down with it, in pharma, you will always find good bottom up stories despite the gloom and doom which is engulfing the entire sector. There are companies which are doing well and which have a good pipeline of approvals and biosimilar pipeline.

Cadila for example stands out in that, as does Biocon. There are also companies in APIs which are doing well which have weathered the storm of the FDA. So there are opportunities. The valuations are not as inexpensive as they are in IT but pharma is definitely a sector among the defensive sectors after FMCG which is looking like there is an opportunity there again. These may not be multi-baggers and these may not match the returns which you are seeing in other sectors but from a large weightage point of view and from a funds flow point of view, the sector has had a rough ride over the last one and a half-two years so even if that reverses partially we are going to see some bounce in the valuations.

Wanted to get your view on ITC and do you think a day before selling that one-term knee-jerk reaction is done with and are we now bound to see some more buying coming in into ITC. On a fundamental basis, if you cannot really comment on the near-term trajectory of ITC, how bigger hit is this additional cess going to be on their cigarette volumes because they are bound to hike prices?

From the various estimates which I saw coming in from the analyst on the street, it seems like a 8% to 10% kind of an earnings cut for fiscal 2018 and obviously that is the kind of reaction which we have seen in the stock.

From a valuation point of view, it was pretty much in the territory where it had stabilised. To that extent, the reaction is done with. Whether the stock will go up depends on whether the company can outperform from the expectations which has been reset downwards in terms of volume growth.

As a company you will get to know how good they are doing, after these price hikes in terms of volumes only for the next one or two quarters and it is not that the valuations are cheap now. As I said, the stock will stay here and will probably go up a little bit, come down a little bit. It is not something which one needs to pay too much attention to in the immediate term.