Interesting that you talked about real estate considering the Q4 updates from most of these companies and PAN India presence players has been very very strong. But I want to understand is that given that when it comes to real estate the problem is always the debt that they hold on their balance sheets, would you stick with the larger players, the more cleaner balance sheets or would you say have an across the board sector exposure because that is going to give you better returns?
I think you hit the nail on the head that has been historically been the problem with the real estate companies, the high debt some of these companies used to carry in the past especially even the larger ones but there has been a dramatic change in the last five to seven years where most of these companies have significantly deleveraged and they are generating good free cash flow in some cases. So I would say rather than the size of the company, large versus small one has to look individual company-wise and look at companies where the debt levels are now under control, because there is like I said still the risk that we may see a bit of a slowdown both domestically and globally which may be worse than expected in which case you do not want to be stuck with a real estate company which is a very high leverage and could really face a pretty bad time.
So therefore still stick with the companies where the balance sheet quality is very good and there are honestly both large caps as well as some small midcaps which are niche city-centric players like in Bangalore etc. which are quite decent and where the sales growth is still going on quite well. And at least over there in real estate, we have not seen any meaningful signs of any kind of slowdown even in the month of April so far.
It was quite interesting that we have seen the likes of an L&T quoting at its 52-week high, the fact that order momentum has been intact. And that really spells a lot in terms of what the underlying economic strength as well is. Do you believe that there is a lot of potential to really build on this theme, the likes of defence, railway, capital goods as a sector?
I think it depends on your time horizon. If you have more than a one-year timeframe, yes absolutely these are in our view a very strong structural growth stories.
The private capex cycle in India has been depressed for a very long time. We are seeing the government both the central government, state government, as well as even PSUs stepping up and keeping up the capex momentum on their side. And we obviously have the elections coming up next year. So generally we tend to see pre-election spending by various state governments and even the national government so the outlook is very strong.
Also as I said, the private capex cycle while it has been delayed and we keep waiting but it is with every passing quarter, we are getting closer and closer to when it sort of takes off. So that is where these companies, while in the short term meaning the next few quarters, there is still the risk of a modest disappointment in earnings or order inflows or perhaps margins.
But structurally, these are very-very high quality opportunities to play the India domestic growth story. And the only caveat I would put is the cap good companies which have a very large proportion of dependence or revenues coming from exports either to Europe or to the US, either to the parents or parent organisations or other customers globally that is where we are seeing given our sort of cautious view on what is going on globally.
The preference would be for those companies which are somewhat more domestic oriented. And L&T obviously is one of them, although they have the Middle East exposure but that again with oil staying quite high that helps them as well. But structurally, we are very positive. It is just short term, we would be sort of more neutralish. We do not expect a very big correction as well, although most of these stocks are no longer cheap but at the same time given the structural growth prospects in our conversation with many investors who have a long-term view, everybody is waiting for a correction to buy these stocks.
What is the house view on how to approach pharma?
For pharma, we are sort of neutralish. It is very-very stock specific. I think one general comment we would make is that the pharma sector is very-very company specific. You have got the APIs, the generics, the domestic kind of companies, the more export oriented companies, and then large caps, midcaps, small caps etc. We have seen a series of generally disappointments across the board, either governance issues or some USFDA issues or delays and ramp up of certain products or getting approvals and so on.
So the general pharma space we would be somewhat cautious. There are a few niche companies or not niche, specialty pharma companies where we would be more positive.
We are not negative on pharma, we are just sort of neutralish and have a very stock specific bottom up view.
However, our general preference would be to go for healthcare and within healthcare, more hospitals not diagnostics. Diagnostics, we still think competitive intensity is very- very high.
There could be risks of further revenue and margin disappointments but hospitals in general, we think the outlook is very strong. The stocks have corrected quite a bit. Valuations are getting more reasonable and these companies are generating reasonably strong growth, and the ROEs are quite good.
And there are both large caps as well as certain midcap hospital companies, regional players or special niche focused hospital companies which are on, let us say, children’s care or something those kind of companies still look very good to us.
