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Here's why Tata MF is positive on pharma but not so much on discretionary consumption space

A combination of lower valuations, least impact from COVID-19, some bit of regulatory leniency or relaxations makes the pharma sector look good at this point of time, said Rahul Singh, CIO-equities of Tata Mutual Fund.

Rahul Singh, CIO-equities of Tata Mutual Fund is of the view that market is reflecting the overall uncertainty that people are feeling even at a personal level. People are hoarding all kinds of things - funds have seen redemptions, there is liquidation because everyone seems to want to hoard cash.
"So at this point of time,  what is very important to analyse or realize is that economies generally bounce back after periods like these. The difference between the previous slowdowns and this slowdown is that this one is a self-imposed, forced one and we have no way of judging how long this is going to continue, whether it is six-eight weeks or whether it is going to be six-nine months. So, in that scenario, some bit of defensive positioning -- being overweight in consumers, to some extent utilities and also pharmaceuticals, which is a new sector that is looking interesting from a valuation perspective is the maximum you can do,” he advised in an interview with CNBC-TV18.
At the same time, he said there are good quality companies in various other sectors, which are becoming reasonably attractive and strong businesses. So, we are keeping an eye on them and adding to those as and when the value emerges in those sectors and stocks, he said.
"This is the most rational way to go about rather than worrying about whether we have formed a bottom or not because that is something which is a function of so many different kinds of newsflow in the US, in Europe, in India that it becomes quite challenging to always try and time the bottom,” he added.
“Discretionary consumption is something which is likely to be hit probably longer than anything else. There is a theory around how consumption habits could change. I don’t entirely believe that an event like this in a country like India will structurally change the consumption habits or change the consumer behavior to an extent that we are in a structural slowdown in consumption. However, given the hit on the incomes and the sense of security, which has come down at the individual level, discretionary consumption is probably the most badly positioned to withstand this kind of a slowdown,” said Singh.
“Within discretionary there are pockets which could come out of this stronger like the digital delivery of products and services, digital food delivery.  So you cannot paint the whole discretionary space with one wide brush but that is one segment which we would be watching very carefully in terms of any potential stress, if this situation continues for longer," he said.
According to him, market would not mind another 21-30 days of lockdown if we are very sure that we are going to come out of this coronavirus spread 100 percent. The uncertainty is around the fact that what if the lockdown does not succeed and what if it succeeds partially then how long does it continue and will there be second and third wave of this and that is where discretionary consumption starts to look a little weak,” he added.
When asked about infrastructure and autos, he said they were anyways going through a slowdown over the last two years. So the valuations had started to become reasonable. The margin expectations which were very high had come down, so we were at a good point of time in terms of trying to say that some of these stocks had formed a bottom.
"This leg of slowdown is an additional layer of slowdown, which has been added on to these sectors. Therefore I don’t see these stocks or sectors any differently from any other sector which is going through a similar slowdown,” he added.
In terms of pharmaceutical sector, he said, “Incrementally, we are more positive on that space than we have ever been in the last two years because there are two-three things at work." From a disruption point of view, once China has been up and running, the disruption from COVID-19 itself has been the minimum in terms of the impact. There are stocks where the valuation of the international businesses is now less than one time sales, so from a valuation point of view they are look good,.” he said.
There is an opportunity in the pharma space for some of these companies to come out of the FDA issues, if  the strictness with which FDA was looking at some of the issues gets relaxed.
"In addition, the companies have been working towards a pipeline, some of those pipelines have been stuck in various FDA issues but over the last two-three years a lot of companies have been correcting their balancesheet, building up their pipeline for complex generics and some of that pipeline will start to see a light of the day in FY22," he said adding that a combination of valuation, least impact from COVID-19, some bit of regulatory leniency or relaxation makes this sector pretty good to look at it at this point of time.