“Structurally near term, there could be some degree of volatility because of question marks in terms of demand continuity, especially in China. If the policy focus remains on decarbonisation, on a slightly longer term basis, demand-supply dynamics for the metals pack remains favourable,” says
Shibani Sircar Kurian, Senior EVP, Fund Manager & Head -Equity research,
Kotak Mahindra Asset Management.

Can this party in metals continue in 2022?
This has been a great year from the equity market perspective and specifically within that, the mid and smallcaps. As a sector, you rightly pointed out that metals has been a stellar performer. What we have seen in the metals pack clearly is that the role of China is changing. Structurally China’s policies have shifted from being growth focussed in the last two decades to being aware on the environment front and controlling pollution. What this means is from a decarbonisation perspective, there is likely to be supply constraints which continue where China is concerned.

One of the key factors and events to watch out for will be the Winter Olympics and post that, how the policy initiatives for China continue. If the focus continues to remain in terms of controlling pollution, then the supply-demand dynamics remains favourable for the metals pack. At this point in time, between ferrous and non-ferrous metals, our preference has been slightly towards the non-ferrous pack, especially aluminium, where demand-supply dynamics are favourable and that is likely to be supportive from a price perspective.

Also, where Indian companies are concerned, what we have seen over the last year, year and a half is that there has been a significant amount of balance sheet deleveraging and debt reduction. We have some exposure to companies which have seen improvement on balance sheet characteristics and where valuations are also favourable. Structurally near term, there could be some degree of volatility because of question marks in terms of demand continuity, especially in China. Given what is happening on the real estate side, if the policy focus remains on decarbonisation, we believe on a slightly longer term basis, demand-supply dynamics for the metals pack remains favourable.

Where do you stand when it comes to banks and financials?
Financials typically are a barometer of the economy. The hope was that as the impact of the Covid started to fade, financial services would perform. However, the entire pack has underperformed. I see two reasons behind the underperformance. One, of course, is that this is a widely owned sector especially where the FIIs are concerned.

Secondly, there has been a list of IPOs that have happened especially in the fintech space and also a lot of fintech players, though not listed, are getting funding. There is a fear of disruption, especially where some of the private banks are concerned. Our view, however, is that banks collaborate with fintechs and therefore the thought that banks will lose market share, especially where lending and loans are concerned, seems to be unfounded.

At this point in time Indian banks, especially the large private banks and a few large PSU banks are extremely well placed. They have capital on their balance sheet. They have made excess provisioning for the possible NPLs and we have seen across-the-board provisioning coverage ratios moving up quite sharply.

Over the last decade or so, we have seen that private banks especially the large banks have been gaining market share both in terms of loans and deposits and therefore as long as the profit pool of the banking sector remains concentrated on the lending side, banks clearly have an upper hand and currently valuations while market valuations at the headline level looks slightly stretched, the sector valuations appear attractive. Therefore we believe there is potential, especially where the private sector banks are concerned and specifically the larger ones and a few select public sector banks as well.

Do you believe that one has already seen a clear rush to safe haven sectors like pharma and that includes diagnostics as well as healthcare services? Is that going to get more pronounced if the Covid third wave emerges?
Pharma as a sector has underperformed. Our belief and our approach to pharma has been very stock specific and that approach continues. We do have exposure to defensives like pharma, IT in our portfolios. While we believe that in the near term, volatility could be there because of the uncertainty created by this possible third wave and the Omicron virus, however, what we have been seeing from a data perspective is that while the virus is definitely far more transmissible than the Delta variant, the virulence could be much lower. So, that is a possible silver lining that one could wait and watch for.

In the pharma space, a couple of things have been happening and impacting the sector, specifically in the US generic markets. The price erosion, which was expected to bottom out, has not yet taken place and we believe that there is possibly another quarter or so to go before we see bottoming out where prices and US generic prices are concerned.

Within the pharma pack, valuations are fairly attractive but within the pack, we see growth coming back faster in the domestic market and the domestic formulations business where double digit growth is likely to continue. Therefore, we have exposure to some of these names on the domestic market side.

On the US business, we are looking at companies which have a steady launch pipeline and therefore as approvals come in, we will possibly see some improvement in terms of the growth trajectory for some of these companies. The hospital space looks interesting. Currently there is the diagnostic and the hospital plays across a few names.

Incrementally, we have seen that profitability of the business has improved and therefore, we have some exposure to a few select hospital names as well. But overall, our positioning on pharma has been very bottom up and stock specific in nature and that continues at this point in time.

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