Are you sensing any opportunity in cement stocks?
The cement sector has done fairly well despite the slowdown in the economy because of pricing stability and cost benefits. The EBITDA margins has held on but the volume growth is missing. The volume has just started to come back, If the real estate sector picks up going forward, then you should see volume growth coming back to 4-5% next year. The sector could be a good proxy to play the overall investments in infrastructure and we are constructive on both large cap and midcap cement stocks.
What is your outlook on the pharma sector?
Pharma did exceptionally well in the last one year. It has given a huge outperformance and the valuations there are now looking fairly comfortable. There is not much upside in terms of multiples but domestic pharma has been growing steadily and because of the Covid outbreak, there are specific opportunities and a few companies which are catering to the Covid demand and seeing strong growth are benefiting.
But on the export front, the US generic space was a big pain point for many years and that is seeing a big up move and Indian companies are well poised to capture and cater to the demand coming in from the global front especially in the API segment. Indian companies have been able to displace some of the Chinese companies that cater to that incremental demand. While that is a short-term opportunity, a lot of companies which have invested in R&D in the last five to eight years, are seeing some of these products coming to the market and with the competitive environment slightly easing, they are getting better margins.
Thanks to the overall rerating in the sector, underperformance will be taken care of but it will be more stock specific from here on.
The countdown to US elections has started. Is there anything untoward that you are factoring in?
One is the election outcome and all the markets will react. So I do not think we should be too positive about it but one could expect increased levels of volatility looking at where the global market as well the Indian markets are. One would tend to be a bit cautious because volatility is going to increase but the Fed policy environment is not going to change. They are likely to continue with the same easy monetary policy with good liquidity and low interest rates. Yes there is some fear that corporate tax rates could increase if Joe Biden comes to power. But by and large, barring volatility,the longer term trajectory for the markets and for the economy should not change.
Are you pencilling in a recovery within the capital good/construction space this quarter?
It will take time for the overall capex to pick up meaningfully. Still the capacity utilisation levels in the sectors are still lower than the normal levels. We are not seeing the big capex push from the government side as the government is still struggling with fiscal deficit and does not have too many levers to kickstart big infrastructure investments. So, recovery will be slow and gradual.
The capital goods sector will probably be a late cyclical and we would have to wait before getting into that sector. Overall construction space in spite of the order inflow has been okayish and not as strong as one would have expected. But the valuations are very attractive and so, longer term, we see demand coming back. We are not so excited about the capital goods sector.