Is the pessimism in auto slightly overdone?
We are significantly underweight in auto notwithstanding the fact that the next three-four months are going to be excellent for the auto sector. We are heading into a phase where after two years, we have a regular festive season that will see pent up demand. Interest rates are low and so the EMIs are going to be low. There is a big tailwind as far as demand is concerned.
On the headwind side, input costs are higher — be it tyres or metals or anything else. There will be an increase in cost or prices which will have to be passed on. There is also oil and specifically in India petrol, diesel prices are significantly higher and that increases the cost of owning a vehicle.
On the flip side, there is this phenomenon of EVs. World over, whenever disruptions have happened in the last 20-30 years, it has always been new companies which have been at the forefront of disruptions. Kodak was a camera maker but it was Canon and Nikon that came in with the digital camera.
Toyota and Ford and everyone is making cars but it was Tesla which is now the most valuable car manufacturer in the world because of its new age technology. Even in India, in the two- wheeler space, it’s the new age companies like Ola, Ampere and Ather which are launching electric two-wheelers rather than the old leaders. Unless some of these companies transition themselves into forward looking companies, autos can be a trading kind of a buy.
The pharma story is turning slightly sour. The sector has been on the wrong side of the market?
Unfortunately we analyse the market movement on a two-three month perspective and pharma did very well last year. There was a little bit of optimism built in. There was huge demand for one category of pharma products linked to the Covid side. The APIs were in short supply and generics did very very well. There was a huge tailwind while other sectors were struggling because of lockdowns.
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As the economy started to reopen as Covid subsided, the prices of a lot of these APIs and generics came off. There was already a huge built up of inventory in some of these medicines because of the fear factor and therefore the last six months, the pharma companies exposed more towards the Covid side of the treatment, saw some degrowth or even a flattish kind of a growth. We are in a phase now when the non-Covid portfolio should start to do better but at the same time, the last two-three months have seen cautious reopening.
As we move forward, in the next three-six months, we may see a comeback for pharma companies which are more exposed to the non-Covid portfolio. Again this is one sector which along with IT, is globally competitive and therefore for any long term investor, it cannot be ignored. Here stock specific dynamics are very different and therefore from time to time, we have different variants of the pharma companies doing well.
Right now, it make sense to be a little bit more towards a domestic side of the pharma but one cannot look at it from a three-six months perspective because last three-six months has been purely a phase where anything to do with the opening up of the economy — real estate, metals –do very very well and the so called the beneficiaries of last year like pharma have taken a temporary breather.