Let us also talk sectors because we know we cannot talk stocks then, but of late that you have done in your portfolio, which sectors are looking good and which could be the likely underperformers as per you.Jigar Mistry: So, the ones that we are very keen on are clearly healthcare and especially pharmaceuticals; materials, specifically cement; increasingly chemicals is something that we are keenly interested in. And banking and financials continue to remain very positive for us, but we were extremely overweight and from that standpoint we have come off a little.
Now that the banking and financial space remains your preferred pick still, could you help us understand would you recommend rotating into largecaps or do you still see value in the small and midcap space?Jigar Mistry: Within financials, there are two differences, one the PSU banks, structurally we do not think can match the ROA of the private sectors and they have run up a little bit. We have also had our fair share of investments therein. So, the ones that we continue to own are the ones in the largecap private space barring one or two in the PSU space. The MFI we still do not think is fully out of the woods yet and had it not been for the freebies that the state governments offered, then you would have seen an even worse off picture. So, net-net to answer your question, largecaps and privates are the ones that we are more positive on.
You just touched upon the pharma space as well, what exactly are you looking at when it comes to pharma plays? The reason I am asking is well, of course, all these export oriented generic companies are a bit under pressure on the back of this tariff tantrum and companies what we get to hear are still waiting for that clarity to kick in, but on the other side the CDMO plays are doing very well. One of the stocks is also up around 6%, one of the leaders rather. So, which segment within pharma space is looking good to you?Jigar Mistry: Both those, in fact. So, if you look at pure play generics, then if you look at what Trump is trying to say and the implications that we understand thereof are two different things. If you want to reduce the pricing of pharmaceutical drugs in the US, then taxing generics is not the way to go and it has been very clear there and the price at which we deliver the generics from India is not really that expensive and they obviously have been kept out so far. So, we do not think that is changing and these are the place that we continue to like. Even the ones in the CDMO space, for example, the one that you also mentioned we are continue to that is part of our portfolio, we continue to remain reasonably positive there on and this is the space, you need to create a structure where the PBMs are not as prominent, the end players are not as sort of consolidated as they are and then you can start deliver the benefits to the final consumer and attacking the Indian pharma space, I do not think is the way out of that.
Lastly, I also want to understand your take on current valuations now. How are you viewing them? Are they really high or do you think they have become reasonable now? And given the current valuations, are you advising a more bottoms-up stock picking or one should go for thematic investing.Jigar Mistry: So, I would say at the end of February we had taken out a large part of froth that was built up. By September 2024, that is last year, you saw especially in the small and microcap space the earnings were growing at 14% cagr for three years, share prices had grown 26%, so there was a 12% compounded froth times three years that needed to be taken out.
By the end of February, even some bits in March we saw a large part of that fall into place very well. But since then, markets have reverted back.
We have had among the best two months USD returns post covid in those two months and the valuations are looking elevated, especially a lot of these narrative stocks which lack earning.
So, our sense is that you are going to see cycles which are very-very sharp. Flows eventually do not drive fundamentals. It is normally the other way around, especially in the longer term.
So, we are continuing to remain a lot more focused on earnings and lot less on where narratives come. Now, one of those stocks, you did see today on how one government contract cancellation and you realise that 50% to 70% of the earnings go away, that risk needs to be priced in and I do not think people are fully aware and pricing those risks in.
