“From our perspective, we are liking the domestic pharma side of it. So, if you look at our companies, most of them are very strong in the domestic market. We think that the domestic market in pharma or healthcare overall by and large is seeing or will see a significant growth and a significant consolidation,” says Rushabh Sheth, Co-CIO, Karma Capital.
Let us understand media stocks. You were of the view that consolidation will happen, which is happening.
Yes, consolidation is happening which is I think going to be a very big driver for the sector overall for the next three to five years. Our sense is that the structure of the economy also is changing. So, when we go from $2200 per capita or wherever we are to say $5000, our sense is that the spending patterns will shift dramatically and media will be one of the big beneficiaries of that shift. So, we think that it is very interesting that you are seeing consolidation right at the point where hopefully the business will start to see significant inflection in terms of consumer spend, so that is why we really like the space.
Why are you overweight pharma?
From our perspective, we are liking the domestic pharma side of it. So, if you look at our companies, most of them are very strong in the domestic market. We think that the domestic market in pharma or healthcare overall by and large is seeing or will see a significant growth and a significant consolidation.
So, if you look at the top 20 pharma companies in the domestic market, they still control about 40-45% of the market and that is how when you see IPM numbers, you see the top good quality companies growing faster than the market because they are continuing to gain market share from smaller companies.
So, our sense is pharma is a structural consolidation story. Good companies will continue to grow faster than the market. Market itself is growing at 8-10% and it is reasonably profitable, generates very strong free cash flows and we are seeing at least the good companies starting to kind of shift their preference over allocating more money in the domestic market versus developed markets.
So, I think we see a structural shift in priority which is reflected in the quality of balance sheets and we see a very strong domestic market which will continue to grow for foreseeable future. Walk us through the outlook then in terms of how you are looking at the entire consumption space because yes, you have spoken about a slowdown in consumer discretionary, but given the fact that as well you have a lot of corporates within the consumption space who have been acknowledging the slowdown, the inflationary pressures, rural concerns, what is your outlook there?
It is more a tactical slowdown because of higher interest rates. I do not think there is any structural issue with the demand. The demand will come back maybe in a few quarters. I think more concern in some of the consumers name is the comparative intensity and I think a lot of segments of consumer space are seeing significantly higher comparative activity with very large players entering the market from various angles.
So, I think that to me is slightly more structural, longer-term concern rather than the demand, which is more tactical and should kind of improve over the next few quarters.
Considering your approach is more bottom-up, what is looking top-heavy right now where you would be at least wary or keep it on your radar other than banks which you have already highlighted?
The domestic economy should grow across segments and our sense is that clearly we do not have too much of a handle on IT because IT is completely driven by what is happening in the developed world, especially US, so that is the space that we do not really have a great handle on right now.
But there are opportunities across other sectors that we see and where we think there is a structural opportunity as hopefully growth picks up as we go into the second half of this year, early next year.
So, we see a lot of opportunities in the domestic space. This is what we like. We are a little concerned on some of the sectors where you are driven by external demand, where we do not know how it is going to pan out.
And what about in terms of the next trigger going down the line, do you think that election uncertainty, what we are seeing with the debt ceiling negotiations, etc, could play a spoilsport?
There are going to be a lot of moving parts. As you rightly pointed out, we are heading into elections in a year’s time and then there is a lot of geopolitical uncertainty. So, we do not know how the next three-six months are going to pan out from overall macro environment standpoint. However, I think we are more bottom-up in terms of our stock ideas. We think companies are doing a great job in terms of execution and our focus is completely on finding ideas across the market cap and segment spectrum where we think that the businesses are doing well and executing well.
So, from our perspective, we are much more focussed on bottom-up ideas despite the fact that the overall macro environment will remain fluid for at least some time.