Post stimulus, cyclicals may outperform IT in short term: Mayuresh Joshi
In case of pharma, there will be a gradual improvement in margins and overall earnings.
Do you believe that with a defensive tilt in currency, it is time for IT to hog the limelight?
IT is already doing that for the past few weeks and months because the numbers have been very steadfast. If one takes the one-offs away in terms of the margin performance, whether it is due to visa costs, wage hikes or otherwise, there was a very decent show from the IT companies. In a classic scenario, when you are looking at a slowdown happening in most sectors of the economy, the sharp depreciation in rupee against the dollar is a sentimental push through from an earnings translation perspective for IT companies, an obvious reaction that you probably saw on the stocks.
A good fundamental outlook along with rupee depreciation acted as a cocktail for IT companies at large. But again, there is a caveat here; A positive announcement from FM for the markets and a huge amount of momentum for cyclicals, may lead to IT stocks actually underperforming from a short-term perspective.
A few of the top tier companies are reasonably valued compared to even midcap stocks. Staying with top tier names and holding on to your positions is a prudent strategy. But as I said, positive announcements may see cyclicals outperforming in the short term vis-a-vis IT.
Where do you stand when it comes to the pharma space?
In the space as a whole, all the bad news have probably played out in terms of the earnings de-growth over the past four to six quarters including the FDA concerns and the remedial remediation costs associated with that. There was obviously higher amount spent in terms of the gross R&D expenditure by a lot of these companies to create a speciality pipeline as the generic drugs were under a huge pricing pressure.
The third element obviously also was the news that we heard in terms of domestic formulations, is the pricing cap and the collusion case that will continue within the US markets. All these factors combined together lead to earnings de-growth for a lot of these pharma companies. Again the exposure in US markets for a lot of these companies, also created the earnings de-growth picture because of pricing pressures.
As the speciality pipeline is evolving for a few of these companies, they are in a very strong position to capitalise on that and they can garner exclusivity from their key launches with the assumptions that most of the plants which either have received EIR or OAI, should probably get resolved over the next couple of quarters, making one hope the remedial cost will go down though R&D expenses might stay at the levels that we have probably seen.
There will be a gradual improvement in margins and the overall earnings profile. So a strong ANDA pipeline, approvals coming through, expectations of benign remediation costs and actually stabilising EBITDA margins should hold out the promise of earnings recovery.
We continue to hold stocks like Aurobindo, Cipla where our belief is the earnings story will be really good. In the case of Aurobindo, the quarter gone by has given a very good set of numbers. The formulation business has grown tremendously and net debt has gone down 18%. We also expect to see the formulations growth from the European and American businesses and the injectable business holding on with key launches supporting their growth.