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    Looking at contra opportunities in pharma and IT: Taher Badshah, Invesco Mutual Fund


    “If looked in the context of the fact that numbers are improving, then valuations at some level will probably hold”

    "It is hard to call on next two months’ basis but if this earnings season passes off reasonably well, then this is the start of the earnings growth cycle."
    In an interview with ET Now, Taher Badshah, CIO (Equities), Invesco Mutual Fund, says pharma is a place where they need to build overweights while in IT, they are reasonably well positioned.

    Edited excerpts:

    Things are getting from great to superb for Indian markets but given the way the Indian markets are trading at premium valuations to its counterparts, do you think the recent 6-7% rally is justified?

    Premium valuations have to be looked in the context of what the earnings and the earnings momentum are and this quarter at least trends up until now seem to suggest that things are finally coming across the way market participants have been expecting as far as earnings delivery goes.

    Aggregate numbers which many of the houses have actually put out for results seem to suggest that numbers are in line but increasingly one should think in terms of how many companies are actually over delivering or beating Street estimates versus earlier.
    When I look at let us the analysis of 35 companies of the Nifty which have declared numbers till now, probably about 75 have actually beaten estimates or met estimates versus this being the number closer to about 55% in the last four-five quarters.

    Essentially, that is a better way to track the earnings delivery versus expectation and on that score probably things seem to be getting better. Headline numbers are much better than what we used to have over the last few quarters. It started off well for a couple of these public sector banks as well which are the usual suspects. If looked in the context of the fact that numbers are improving, then valuations at some level will probably hold given that many of the other macro variables are reasonably in place.

    What do you make of the market levels? Do you think we can make run for 11,000 in the time left for this year to close out?

    We have got about one-and-a-half, a little under two months to go. So, it is hard to call on next two months’ basis but if this earnings season passes off reasonably well, then this is the start of the earnings growth cycle because by December end and March end, we would have passed some of the uncertainties related to GST and DeMo and RERA and so on which have dislocated earnings. We will see better year on year growth numbers going forward. If we are prime for about 15% earnings growth in the next year, then over the next 12 to 15 months’ time, I would not be surprised if Nifty can deliver another 15 odd per cent in terms of returns.

    Insurance one large sector which has got created in last six months. Are you a buyer there? If yes, which way are you leaning – life, general, reinsurance?

    We have not been significant holders of insurance companies as yet barring some exposure to general insurance. We have been a little wary of valuations out there and while they are great businesses, they have got a good runway ahead of them in terms of growth profile. We have been sitting on the sidelines as far as life insurance companies go and we are happy to look at them when they become a little more attractive. We have given them a pass for now.

    How is it that you are viewing the pharmaceutical space now? A spate of good news coming in, earnings recovery seems to be coming back and M&A is keeping the sector excited as well, we saw that just with Torrent Pharma as well as the Unichem deal as well. Are you a subscriber to pharmaceuticals at all or are you still avoiding them?

    Up until very recently, we were sitting on the sidelines even in pharma simply because earnings were correcting even more sharply than prices were and therefore there was not really much scope to buy them on beaten down valuations as a metric.
    But yes, you are right that increasingly there is evidence that margins are getting better for this sector.

    We are seeing USFDA being a little more benign and even favourable in certain cases in terms of outcomes and it is a sector where we have seen sharp downgrades and sharp erosion in earnings but this again is a sector where when earnings come back, they will probably come back as sharply as they have fallen simply because it is driven by largely couple of products or couple of approvals which need to fall into place and business can resume meaningfully in a very short period of time.

    This is a sector which will have high volatility in earnings and one needs to be cognisant of that before investing but the headlines surrounding the sector are clearly getting a little better and that should throw up some interesting opportunities which we are evaluating for the sector.

    Would you be looking at reviewing your call on IT and pharma? I do not see them as the preferred bets, IT may be certainly but even in your major holdings, pharma and IT are missing?

    Yes. In a couple of funds, we have a decent positioning in the IT sector especially in funds where we are little more value oriented and where we are willing to take a contra call.

    Pharma as a sector will obviously at some stage fall into the space of contra/value investing and we are trying to look at ideas wherein we can play the sector and at the same time see reasonable downside protection.

    We are still guarded about not seeing significant earnings downgrades or miss on earnings. It is still a difficult sector but as the margin opportunities are, we would like to look at them. So, clearly pharma is a place where we still need to build our overweights or our weights. In IT, we are reasonably well positioned.
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