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Avoid financials, nibble at pharma, chemical stocks: Dipan Mehta

Buy stocks that will benefit from supply chain disruption, says Founder & Director, Elixir Equities.

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Last Updated: Mar 26, 2020, 04.31 PM IST
Dipan Mehta-1200
As a strategy, no doubt, buying on decline is a good strategy and we all know the companies we should be buying.
Do you feel that maybe the poison is getting close to getting out of the system? We have seen some recovery come in on the US markets. Yesterday was a meaningful recovery for our markets as well. Is it possible to take a call on whether the market may be close to bottoming out?
The thought that I am grappling with is the life after lockdown. Even if we get the coronavirus under control, what are we going to do after that? Will we travel that easily? Are masks part and parcel of our life as we see in China? Will we have to sanitize everything again and again and exactly how will people engage with each other? There are a lot of unanswered questions and I would not be too confident about global recovery or domestic recovery unless we have a solid cure to this problem. These cases will keep on coming even after the lockdown is over as we are seeing in China, South Korea and Singapore.

So that fear will remain in the minds of the ordinary citizens and they will take precautions. They will become extremely scared. Their consumption patterns will change. It will be more towards savings and conserving their resources and companies also will have to rethink their strategies in terms of human resource management, supply chain and managing the demand going forward. So it is going to be a new world.

While we have seen a slight uptick in certain healthcare names on the back of expectations that they are essential supplies, they are also dealing with challenges.
Everybody is dealing with challenges. Nobody is spared and their predicament is that the government wants them to produce more to keep the supply chain going, to keep the medicines available to the mass public. However, their suppliers are being constrained, their employees are being constrained. There is also a moral dilemma in running these factories having so many people coming close together to keep their operations going. So everybody is grappling with such issues and you should be prepared for shortages.

I was seeing your report about vegetables getting over. Although whatever assurances the government may give, there are going to be shortages. Everything is not going to be a smooth sailing because we live in an interlinked world and it is going to be a problem. So in this downturn, even companies which have got demand may be constrained because of supply and therefore report some normal or slightly diminished numbers. So that is going to be the challenge going forward as well.

There also needs to be realisation and understanding for investors that although we are very positive on pharma companies and on healthcare companies, it does not mean that they will be the first to report fantastic numbers from the June quarter itself. They will also have major challenges in terms of deliveries and booking the revenue and taking advantage of demand. So you should expect those companies to be under stress. But one thing is certain that any business which is dealing with healthcare or anything which is related. the markets will start giving it a higher PE multiple.

How are you reading into this buzz around Reliance that Facebook may be picking up a stake in Jio? Does it arrest concerns around the high debt which Reliance Industries had on its book and may be the stake sale will mitigate some?
I always maintained that Reliance has many options to reduce its debt and they will explore all those options. So in case they are unable to get a partner for the refining business, there are other businesses that they can get partners for or sell minority or strategic stakes. At the same time, lower interest rates will also benefit that company because that is going to be the first step which RBI will take and globally also, interest rates have come off significantly.

So while it may operate temporarily with slightly higher debt, I do not expect the actual interest cost to move up. They will be able to manage pretty much fine. You may again see this trend towards larger companies coming back into reckoning. Pre-coronavirus, we had seen a decent amount of adjustment in midcaps; maybe that will again reverse and go back to a lot of interest in largecap stocks.

Would you agree that that is what the market needs right now? After all the world’s central banks have moved, if our moves and if we do get that stimulus package announcement from the government, could it arrest the market fall at least?
Central banks will act and react but I would not conclude that the worst is over. It might be but we cannot come to that conclusion that global volatility has come down and global markets have stabilized. Those are very difficult statements to corroborate. The real challenge will come when individual companies will start reporting what damage has been done to them. I am already seeing news flashes about credit rating agencies downgrading a whole host of companies. So it is going to be a bit of a mess. Let us be prepared for it because the credit rating agency will still take that 90 days or so in identifying a company and giving its rating.

Although the RBI may give forbearance, it necessarily does not mean the rating agencies will have to follow. So we have to learn how to navigate these things. So let us not come to any conclusions right now and make any decisions based on that.

As a strategy, no doubt, buying on decline is a good strategy and we all know the companies we should be buying. Avoid the financials, buy the chemical companies, the pharmaceutical companies and all the healthcare-oriented companies. Many guests have come in and propagated that investment theme and I agree with that buying companies which will benefit from disruption in the supply chain. So all those investment ideas are there but it is just about nibbling; buy at decline and be prepared for further downside or further violent movements up or down and not jump to any conclusions. We have just about started our journey and it will take a while. In 2008 also when it happened, it took five-six months before we could see the worst is over and credit markets and the real economy started getting back into the normalcy zone.

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