Most pharma stocks are quite speculative in nature: Saurabh Mukherjea

Saurabh Mukherjea has explained the merits and demerits on investing in Pharma stocks, Banking stocks and Real estate ancillary stocks in his latest interview to ETNow.

Pharma stocks

Saurabh explained that Pharma stocks like Cipla, Lupin and Sun Pharma face a major challenge because there are many moving parts and it is difficult to understand where exactly the competitive advantage lies.

He pointed out that Divi's Lab and Abbott Labs are the two pharma companies where it is much easier to understand the demand dynamics.

Divi's is the world’s largest manufacturer and has other Pharma companies as clients. The world’s six largest pharma companies are driving 80%, perhaps even 90% of Divi's profit, he said.

"So you can see the monopoly and the base. You can understand the business and go forward and commit to a long-term investment as you have done in Divi's. The other pharma company where we have understood the business quite clearly and been able to commit significant parts to our portfolio is Abbott Labs. It is similar to Nestle in some regard. They are selling essential products like Vertin, Thyronorm and Cremaffin to the Indian public".

Saurabh also stated that Thyronorm and Vertin are high quality drugs which generate heavy free cash flow for Abbott. There is not much competition for these products.

He warned that beyond Divis and Abbott, the other pharma names are quite speculative in nature with too many moving parts and very heavy regulatory uncertainty.

Astral Poly, a play on the real-estate boom

Saurabh has already disclosed that Astral Poly is his favourite stock to play the real-estate theme.

He pointed out that the next part of consumption is of discretionary consumption and the ecosystem built around it such as tiles and sanitary ware and laminates and so on.

"Astral Poly is the only one where we have been able to build confidence. This company can give us multi-year compounding as we go into a three-four year economic recovery. So, Astral Poly is our main play," he said.

He also stated that Asian Paints and Pidilite are very reliable and very steady compounders.

Private Banks vs. PSU Banks

Saurabh pointed out that the top five or six private sector lenders like HDFC Bank, Kotak Bank, Bajaj Finance, Axis Bank have made about six to seven times more Covid provisioning than the top three PSU banks – SBI, BOB, PNB

"The cumulative loan books of top three PSU banks and top five or six private sector lenders are similar in size but the private sector banks have provisioned six to seven times more and therefore to use a popular aphorism, the Queen’s Gambit move, is load up on the top private sector lenders who have already provisioned super heavily for Covid," he said.

"The provisioning disparity is very stark and it is obvious that there will be Covid NPAs and COVID write offs as we get into 2021," he added.

Brokerage and insurance stocks

Saurabh pointed out that on the savings side, he is investing in brokerage stocks since they have about 60-70 lakh new accounts in the last six-seven months. He also stated that private sector life insurance stocks will have a super run and so he has bought HDFC Life there as the main play across several portfolios.

In addition, positions have been built in smaller banks like AU Small Finance Bank and City Union Bank which are well provisioned lenders and asset management, broking and life insurance on the savings side have several good years ahead, he added.

Reliance Industries

Saurabh candidly stated that he does not believe that Reliance Industries is investment worthy.

"I cannot quite figure out where the free cash flows will come from," he said.

"Indian retail is a tough game -- be it Flipkart, Amazon. Beyond a DMart or a Titan, not too many people have generated free cash flow there," he added.

He also stated that telecom companies are also not able to generate free cash flow.

"The lack of clarity on future cash flows and specifically lack of clarity on future free cash flows has kept us away from putting this in our portfolio," he said.