Don’t go for rotation trade; stick to own convictions: Mihir Vora

While pharma started off very well in 2020, 2021 did not quite turn out to be the best of years for pharma. In fact, of late, the pharmaceutical stocks at best have just been consolidating besides a few sporadic bounces here and there. Do you think a large part of the outperformance is now ahead of us?
Absolutely. The structural negatives which were there because of the FDA issues for almost five years will start getting resolved. In the shorter term, there might be some headwinds as far as raw material prices are concerned and so one might see some volatility. But the worst of the crisis that the Indian pharmaceutical sector faced, especially from the US regulators, should be past us very soon. In the next one or two years, we should be back to being the global production hub for generics as well as bulks.

Are you a big fan of this rotation trade? Be it Aurobindo Pharma or a comeback in ITC or perhaps how SBI has outperformed in the last one year, the markets are telling us that it is time to rotate, get out of high growth, high expensive stocks, look at basics of investing whether it is a low PE or whether it is cash flows?
No, one should stick to one’s own investment philosophy. Just because commodities did well in the last four, five months, does not mean that growth had a reasonable price and quality investing is out of fashion. And there is no one answer, no strategy works well in all conditions. So one has to stick to one’s own style, one’s own conviction and take the calls accordingly, frankly speaking. This rotation trade may be good for traders but then we know what percentage of traders actually end up making money in the long term!

So if you are an investor you would be pretty much well off sticking to your own convictions and your own style over the long term.

Where are you picking your spots? Where were you a buyer when markets fell and Nifty went below 16,000?
As of now, we believe that probably the best of the global theme is past us; so exporters like IT, to some extent auto ancillaries etc did very well, even pharmaceuticals did very well because of the Covid, but now we have seen a correction. So, I think things are back to normal there. We can still pick and choose from the pharma sector.

But broadly speaking, the best of the globally linked segments are past us and if the world comes back to normalcy, hopefully sooner rather than later, it is time for the domestic theme and that includes financials, consumer discretionary like auto and the industrials. I do not think India can do a 7% GDP growth rate without these three segments doing well. That is what our focus is at this point of time. And these are also the segments which did not do well in the last two years so there is relative value here.

What is your view on the entire metals pack? The rally has been going strong from the 2020 lows but the question is how much more can commodities push forward at a time there’s raw material cost pressures across sectors?
It has been a very difficult space to take a call on. Last year, it was all about very strong demand and supply disruptions because of logistics issues on Covid. We had raw materials etc getting disrupted and the Indian converters, especially the ones which were backward integrated in the steel segment, did very well. This time around it is a question of further supply disruption but because of the war like situation and to some extent the re-emergence of Covid in China.

The only thing we do not know is how permanent or how long lasting these capacities shutdowns are. China most likely will not be very long term, probably a couple of weeks and we should be back to normal. The European capacities, especially in Ukraine steel making, which got destroyed obviously are not going to come back in a hurry but that again is very specific to Europe and the biggest producers of course are India, US and China.

So to that extent, matching demand on one side and the supply disruptions on the other side is becoming a very complicated equation. We would rather play it very tactically rather than calling it a big super cycle or something.

What are some of the new-age themes you are bullish on – fintech, clean energy?
We should be bullish on the areas where the government is serious on. The three or four themes that we are talking about includes defence manufacturing within India. Second is not only the traditional industries but the whole host of segments are now being incentivised to make in India by the PLI scheme. There will be more and more news in more and more segments and so that is something that the government is serious about and they are putting their money where the mouth is and getting in very, very large serious players. PLI, atmanirbhar, indigenous manufacturing and defence manufacturing have becomes more and more crucial.

We are looking at alternative energy. The government has rolled out very good incentives for alternative energy themes like hydrogen, ethanol theme. The government is seriously putting its money where the mouth is in these two themes. These are the places where a lot of capex is going to be incentivised for the private sector and that is where we would be focussing more on. Fintech business models are innovative, disruptive and at good valuations, these companies become attractive and we have seen a decent amount of correction in a lot of the consumer tech and fintech companies. At some point in time, we would definitely like to look at this disruptive theme also.

When would you feel ready to buy new age tech stocks like Zomato, Paytm or Nykaa? Are these stocks 10% away, 15% away, more than 50% away from your comfort zone?
Very difficult to call a top or a bottom in these names. The thing is that one should probably want to buy when there is extreme pessimism and the way stocks are moving so rapidly over the last couple of months, the time for extreme pessimism might be closer than what we think.

Where do you stand in the cement sector because there have been concerns with respect to the kind of contraction that we have seen in EBITDA margins?. Going forward, how are you looking at the monsoon and the overall cost structure for some of these cement companies and the entire demand scenario?
The current issues are more with raw material costs and margin issues. But this is one segment that we have seen which has been able to maintain price disciplines over long periods of time. While of course the price movements in some of the input costs have been extraordinary, I do believe that ultimately there is pricing power in this segment. It is a consolidated industry and there is some discipline out there.

If there is a real negative sentiment around the segment, it has typically been a good time to buy. Cement plants are not easy to set up. There is a huge entry barrier and it is an absolutely necessary commodity. So all the noise about some of the real estate associations threatening to stop work, etc, is adding to the gloom and doom scenario which typically is a good time to start nibbling in segments which have a long-term competitive advantage.

Given that there is an assumption that we will see the regular price hikes sustaining, do you believe that most of the OMC stocks are likely to reverse the kind of underperformance that they have witnessed recently?

They should but the kind of price hikes that are required are quite large. We are nowhere close to what is actually needed. It seems the government is hoping that the spike in oil prices globally is transitory because if that does not happen, we still have a long way to go before the oil marketing companies start making decent money, at least normal margins.

It has been a disappointment from the OMC point of view, the kind of oil price hike that has happened and to that extent, in these uncertain times, maybe we will probably not see OMCs go to those kind of valuations which were prevalent one or two years ago when there was bullishness around divestment, etc. There has been disappointment as far as the freedom to price the products is concerned.We may see a bit of de-rating structurally though there might be a valuation pop but that is less likely to be long lasting.