Sailesh Raj Bhan on what to do with IT and pharma stocks now

If IT businesses are back to 8-10% earnings growth, the current 20 multiples may not be sustainable for a lot of them. As we have seen in the past, multiples do correct significantly when growth evaporates and directionally, if you are looking at single digit earnings growth for these businesses, you may still have some time for these sectors to be becoming very attractive from an investment point of view, says Sailesh Raj Bhan, Senior Fund Manager,Nippon India MF

Is the valuation now reasonable or attractive for the IT counters as well because growth is something which is definitely slowing? There is then the entire BFSI pressure plus the changes of leadership. How does the IT sector stack in your assessment of valuation versus growth?
There is still some time correction possible in these businesses because general growth rates have been coming off or likely to come off meaningfully because the main markets are just entering the challenging phase which is US and European markets. For this sector, even though valuations seem to have corrected, the earning uncertainty still remains.

If these businesses are back to 8-10% earnings growth, the current 20 multiples may not be sustainable for a lot of them. As we have seen in the past, multiples do correct significantly when growth evaporates and directionally, if you are looking at single digit earnings growth for these businesses, you may still have some time for these sectors to be becoming very attractive from an investment point of view.

Over the years, you have in a sense identified pharma. You have owned stocks like Divi’s, the MNC pharma names. What has gone wrong there? One company after another is getting hit because of the US FDA or pricing power or both and it is not only just US-based companies. With the exception of a few domestic companies, the entire sector is going through a tough time.
Interestingly, this has also gone through a cycle. We have seen a very sharp rebound post-Covid. It has come off a bit and we are now back to very normal stocking of inventory, normal business environment for these companies. You mentioned three or four challenges. The biggest challenge has been the expensive valuations in select pockets of pharma space where stocks went up three, four times in a very short period of time because of Covid-led products driving or expected to drive their substantial growth.

Those corrections have happened. If you look at normalised business conditions, most of these companies on core earnings are still growing 10-12%. It is just that they had a bump up of profits coming from Covid which have driven very significant re-rating for select businesses and they have now normalised for growth.

Second, the area where the challenge is real has been the US pricing environment. The US market has suffered on a profitability point of view fairly significantly and we have seen price erosions continue there despite prices being lower already and due to high competitive intensity. That phase still continues and the US market attractiveness remains fairly modest, but the core for pharma which is the branded domestic space remains as strong as ever.

We are seeing a meaningful increase in diagnosis, hopefully shifting to greater compliance and also the opportunity here for getting new patients into treatment and giving them solutions is very significant.

The domestic branded space still has a meaningful decades-long growth opportunity and that is where our focus should be and our focus is because these are branded businesses. Leaderships do not change here very easily in terms of categories and products people operate in and the chronic market play of India continues to support growth in a lot of these branded Indian pharmaceutical businesses.