The trend in the market, of course, was about what is happening to rates, to CPI. Now, with the RBI meeting being away and new CPI data coming in, how would you look at that? Do you think that is the reason markets have stabilised of late?
Well, we can find reasons and justify why the market has stabilized. One of the reasons could be what you said. I think one of the bigger reasons is that the Indian macro is starting to stabilise. The dark clouds on the Indian macro, where there was a relentless rise in US interest rates and relentless issue on US inflation, are starting to recede a bit.
In the Indian context, it is the current account deficit which is starting to give some respite to people and that is also maybe a reason that the RBI has taken a pause. All of that added together means that home loan rates, which is the biggest barometer that we try to stick to. Whenever home loan rates start to go beyond 9%, they start hurting the economy.
Today, they are closer to 8-9%. If they stay there for the next 3-6 months and if data improves on the inflation side, globally as well as locally, then we will start to make some room for cuts of 25-50 basis points, depending upon the macro, commodities and then interest rates.
There are some rays of sunshine in the market coming from the pharma space. How are you viewing the pharma space? Is that something we should be watching going forward?
The pharma space has underperformed on a 5-year basis but pharma is a very unique sector where at any point of time, one can find one stock at a 52-week high and another stock at a 52-week low. That is very counterintuitive to how a sector behaves. It happens because pharma is a sector which is totally bottom-up, where one company is not the same as the other. So it is not a homogeneous sector.
Pharma is a heterogeneous sector and we have to always evaluate pharma on a bottom-up basis. At times, you will want to play India-dedicated plays, at times, where you believe that the US is likely to do well, you would like to play the companies which have more exposure to the US. There might be a time that you want to play none of these and you want to play it chronic and acute.
In pharma, at every point of time, one can be invested. But at the same time, in pharma, at every point of time, one will find stocks which are overvalued and should never be there. Pharma is a small index weight, about 3% or so. One should always be bottom-up in that sector and not try to take a view on the sector per se because it just does not work that way.
How would you look at pharma? Would you play the healthcare space? Would you play an India-dedicated story, an API play, a US play? Isn’t this sector completely neglected and there is a lot of value in various names?
There is some value in some names. Currently, as we talk, some of the India-dedicated players stand to benefit more, simply because today there is not such visibility in the US market on the pricing and the way they are behaving.
But the Indian domestic market continues to grow at 10-12% and the Indian-dedicated players will not find it very difficult to grow at 15-17%, especially the larger ones, especially the good India-dedicated companies. Currently we believe that the Indian plays offer better value rather than the offshore plays. I think the hospital space is now getting to a point where it does not look that attractive to us, simply because valuations have re-rated.
Now there are a lot of options in the hospital space for someone to invest in. As more and more companies get listed in any space, the valuation of that space tends to de rate because the scarcity factor starts to reduce. We must always keep that in mind. Ultimately, companies move on what return on capital employed they generate and it is not necessarily a space which generates humongous 20% ROC on a sustainable basis. One should be a little cautious now on the hospital space, given that the valuations have risen there.
