Pharma,
IT, auto and commodities gain amid unusual circumstances, hoping they will
benefit in ordinary conditions
24 August
Undoubtedly, Reliance Industries led the
market recovery from the pessimism of end March lows. The apparent ease with
which the petrochemicals-to-retail conglomerate amassed over Rs 2 lakh crore
from more than a dozen big-bulge investors and own shareholders within three
months paved the way for other Indian companies to issue equity and debt.
Importantly, domestic investors felt confident of the Indian economy’s outlook.
After all, Facebook, Google and the Saudi Arabia and the UAE governments will
not be taking exposure to India’s largest company by market value if they did
not see growth visibility. In the ensuing euphoria, the contribution of several
wealth creators did not get adequate attention. Those not enamored by the
leveraging of the telecom platform to connect farmers with consumers through
mom-and-pop grocers looked majorly at four sectors benefiting from being at the
right place at the right time, turning of the wheel and having nothing further
to lose. The coronavirus outbreak opened up an opportunity for one, while cash
injection in export markets supported another. Clearing of regulatory overhang
and anticipation of recovery following the easing of lockdown restrictions
propelled the others. Ironically, a return to the pre-pandemic period might
disrupt the dream-run of these outliers.
The current medical emergency enhanced the
visibility of drug producers. Interest in sanitizers and malarial antidotes
surged. Many were quick to develop and launch anti-viral remdesivir to treat covid-19
patients. The margins got inflated on dollar earnings, aided by a weak rupee.
Not only is the pharmaceutical sector one of the three to provide positive
returns in the current calendar till date, its appreciation has been the
highest. Intensifying competition in the regulated generics markets and US
President Donald Trump’s order to import drugs for senior patients with the
lowest prices from economically comparable countries are potential disruptors.
Several players are looking to Latin America and Africa, where demand is plenty
but scope for the upside limited, to diversify risk. Not only that, the
overarching FDA blocks imports from plants falling short of its exacting
quality standards. Lengthy and costly litigations for patent infringement have concluded
with millions of dollars in settlement. The sustainability of the current
business model is uncertain just as it was for tech solution providers
prospering on back-office work. Shift to
work-from-home and contactless selling have hastened the transition up the
value chain. Their future appears bright as the reliance on the digital mode
for communication is likely to be the new normal as captured by the bumper
earnings and soaring valuations of US internet properties. Revenues of
investment bankers in America and local brokers got a bounce as restless
investors took to online trading. The downside will be pressure on operating
profit as more players enter the fray and dip in consumer confidence if an
effective vaccine is not available soon.
The pain of piled-up inventories on
automobile manufacturers in the run-up to the BS-VI emission regime has
disappeared. Expectation of increased footfalls to snap up new models was
dashed after the nationwide shutdown end March. Two-wheelers and tractors,
riding on rural prosperity following a good rabi crop and timely arrival of
southwest monsoon, are showing traction but not commercial vehicles. Despite localized lockdowns making
transportation challenging, investors betting on buying to catch up going ahead
pulled up the Nifty Auto index to third-best performer, beating the benchmark
from July till date. Similarly, the upturn in commodities is discounting
consumption coming back as the mortality rates drop. From below US$20 a barrel
level in April, Brent crude has more than doubled. Metals are crackling as the
US and China signal slow but gradual rebound. Hike in MSP and ease of credit to
farmers have bolstered profit of fertilizer and pesticide makers, with the
Nifty Commodities outpacing the mainline indicator over a month. What is common
with these sectors is their lackluster performance before March. Now they are
basking in an extraordinary situation in the belief that they will get their
rightful dues on the restoration of the old world order. With pharmaceutical
stocks slowing down over the past few days, what will be keenly watched is
whether they will be able to maintain their momentum or return to their traditional
roles as cyclicals and defensives as other laggards pick up speed.
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