PSU banks emerged as the top sectoral gainers yesterday. What do you make of this sectoral churn because earlier we were seeing this on a slightly longer, a three-four session basis, or a weekly basis; but now we are seeing a new sector emerging as the top sectoral gainer every day. What is your take on the sector churn and where are you seeing value?
Dipan Mehta: It is difficult to say why one sector will do well today and what will do well tomorrow. These things keep on happening. It is like predicting which stocks will do well. And when it comes to the sector, if one or two stocks in the sector start to do better, then automatically traders get onto the bandwagon, and they bid up the other shares also within the same sector.
So, if SBI starts to do well on a particular day, then tier II banks, Bank of Baroda, Bank of India, Canara Bank also start to rally because of trading interest and then you have the feeling that the entire sector is doing well. But it is part and parcel of being in the market that some stocks, some sectors do well on one day and then can be forgotten the next day and some new stocks may emerge as well and these rallies are difficult to predict, whether they will be for one day, two-three days or so. One cannot really comment on this sector churn per se.
As to your second question about where do I see value, it is getting very challenging to find good quality stocks at reasonable valuations and the reason why the market is stuck on a sideways movement is because unless the corporate profits improve significantly from these levels, and you cannot justify higher prices because of the way the valuations are and the liquidity remains so strong that at every correction there are buyers. But they are not chasing the stocks because at the end of the day, they are professional fund managers, and they are not just chasing the stocks higher and higher and expanding the PE multiple. So, unless we get support from earnings growth, I suspect the market may remain in a sideways zone for an extended period of time.
What is your take on pharma and any sub-pockets you are liking?
Dipan Mehta: Basically pharma remains under cloud because of Trump tariffs and eventually if there is some amount of tariff, it is going to just increase the pressure on margins for these companies. In any case, competitive intensity is very strong in the USA and so every company will have to decide whether to pass on or absorb the tariff if at all there is anything.
But within the pharma space, we are very positive with usual disclosures on the CDMO space and even if certain tariffs are levied broadly across all formulations, the CDMO space is basically low volume high value products and because of that, they will be able to manage any tariffs which are there. Also, the relationship which the CDMO companies have with their customers is pretty much long-term and highly sticky. It is not commoditised. So, the best way to play pharma is the CDMO space. Companies like Divi’s Laboratories, have had a minor setback just now, but they have emerged stronger from every challenge that they have faced. It is the largest company in India which is into custom synthesis. There is also OneSource Pharma, Blue Jet which comes to mind, Cohance, Dishman, all of these companies have great prospects. Neuland Laboratories is gradually growing its CDMO business and Piramal Healthcare also has a CDMO business. So, within the pharma space, one needs to work with companies which have a high proportion of revenues from the CDMO. That seems to be more like a stable growth business and clearly benefiting from China plus one strategy.