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    Time to ride growth and momentum, go for IT and pharma: Ajay Bagga

    Synopsis

    It is better to play external focussed sectors and within that, growth stocks are the best place to be in at least for the next three to four months.

    Ajay Bagga-1200ETMarkets.com
    Valuations are not low in external focussed sectors but growth is there and they are not connected to the domestic economy which is in pain, say the market analyst.

    What do you make of the buzz in the pharma space? The sector has done phenomenally well from the start of the year. Where are you finding value within pharma?
    Pharma valuations are high but there is growth as well. I particularly like MNC pharma. There are a lot of drivers related to the Covid vaccine with new medicines coming in. Within the domestic pharma also, in the last four-five months we are seeing a recovery. Pharma is clearly in a growth momentum and globally it is doing well. Our companies are largely suppliers into the global chain. As pharma ingredients suppliers, they will do very well with the government subsidies and the thrust on replacing the 70% Chinese API dependence. You will see a huge expansion of the domestic API providers.

    Again with the new legislation in the US markets, we have to see if they will start manufacturing the intermediate ingredients within the US. That could have an impact and that is one cloud in the horizon. Second is the Department of Justice action. As we saw with Sun Pharma, they settled and moved on. We are expecting most of our companies to be able to settle and move on. Overall pharma remains a buy globally as well as in India.

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    How are you looking at the story of Bandhan Bank panning out on the basis of the kind of commentary that has been given by the management as well as the latest news?
    Their capital adequacy was already very good. Here, the promoter had to reduce their stake as per their agreement with RBI and so the supply overhang goes. But overall, the financials are not in a good spot right now. I have been saying that for the past couple of months. What could be a trigger is the RBI policy. If there is some clarity on one-time restructuring because the moratorium ends in August, otherwise we have nearly Rs 10 lakh crores of loans in moratorium across banks and another big portion in NBFCs. So, we will need some clarity from the regulator. Even the finance ministry has been talking about one-time restructuring for some sectors.

    The RBI policy has become very critical. Maybe it will not get taken up at the policy level itself, but at the press conference, the governor will have to come out with something either on 6th or very shortly thereafter because the moratorium ends in August. Without giving a buy or sell on Bandhan, I would just say that financials right now are a no go zone , We are seeing that institutional investors are not really adding positions. With mutual funds also seeing negative flows, probably the July number will come at a net negative number and that is what the DII numbers have been portraying throughout July.

    You could see that financials have come under twin pressure; one is the moratorium issue and unless there is a strong action by the government and the regulator, you could see an overhang. Second is the buyers, new money not coming in in terms of potential buyers and financials slowly being under owned. IT, pharma are very much in demand. Financials have to see the resolution and then institutional investors will see the behaviour over the next three months on how the moratorium books really pan out and will restructuring solve at least for the next one year an ever greening of the problem loans. There are a lot of ifs and buts in financials which are not the leading banks. The top banks are three times books and clearly not cheap at all. There's a lot of uncertainty around it. Financials will stay like this and could go down even further.

    What is your outlook on earnings within the cement basket? Where within cement would you place your bets?
    Cement is a buy. Cost control really worked well over the last year and this past quarter, those benefits came through into the cement companies. We like large cap end of cement, They will do much better and grab market share. A lot of the cement demand goes into the rural market. So it will also depend on who has the better distribution and who is able to reach the rural segment and which regions is the cement player functioning in.

    We like the north and west based players more. They will do better and again the rural demand will drive cement, not the institutional demand. The infra demand will take time to come through because of the lack of funds in the economy. But the rural demand which is a significant portion will really be driving cement. So, cement stays a buy, metals stay a buy on the Chinese stimulus and the Chinese growth. Even toda,y the Chinese PMI for July came above expectations. The European PMI for July is in the 56 range and so a strong recovery there. Metals will follow that. I would say buy metals and cement for different reasons: metals for global growth and cement for the rural offtake. The costs are well in control, margins are good, volumes will not be that great but as we saw in the last quarter, we are expecting profitability to continue.

    For the IT space, by and large, the commentary remains fairly optimistic and even bullish. A lot of companies are saying that the Covid impact has bottomed out and they are tracing the growth path. Would you buy into the IT basket?
    Again, there is a strong momentum in IT. Normally when the dollar goes weak, IT companies tend to suffer but a weak dollar also has a very strong correlation to emerging market growth sectors. So, any growth momentum sector in emerging markets tends to do very well in a weak dollar scenario as we saw in July.

    With an imminent $1-1.5 trillion stimulus coming from the US and the Fed extending all its nine programmes into March, emerging market growth sectors will outperform and that is what we have to focus on. Value is still in, value might take a year or so. We have to see a substantial correction in the market and people have to give up on growth and momentum and then you will see value coming back. Right now you have to ride the growth and the momentum. The currency market, the bond markets are showing that time is ripe to continue in sectors like IT, pharma.
    Valuations are not low but growth is very much there and they are not connected to the domestic economy which is in pain. India’s PMI came in at 46, it fell below the previous month's PMI. So, we did not have a very good manufacturing recovery domestically. I would say it is better to play the external focussed sectors and within that, growth stocks are the best place to be in at least for the next three to four months.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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