In Conversation With Trust MF's Mihir Vora
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00:00Thanks for tuning into Talking Point. I'm your host, Neeraj Shah. The case for a chat
00:16for our guest today is, is banking on financials the right bet under the current context? Is
00:23IT in for a bit of a turnaround? Because his bets seem to suggest that they are bracing
00:28for some bit of an uptick in IT relative outperformance relative to the past. Have aerospace and defense
00:34and some of the sectors which have run so well in the recent past finally run their
00:38course? Or could there be more? And of course, because he looks at macro with as much keenness
00:47as micro, we cannot let Mihir Vora go or we cannot start a conversation with Mihir Vora
00:54without talking about the global macro. He joins in on the show today. Mihir, thanks
00:58so much for joining in. I was really hoping that we do it in person, but maybe some other
01:02time. I understand you had to go to your office today, but yeah, some other time in person
01:06from our studios. But thank you for taking the time out, Mihir. And just such a perfect
01:10day to get you. We've seen the non-farm payroll data come out. And the interesting thing is
01:16that maybe earlier the market wanted weak data to lead to some heavy central banking
01:22action for the markets to do well. Now, the market seems to be worrying that yes, there
01:28will be central banking action, but growth seems to be a problem. And therefore, there
01:32is a worry out there too. How do you look at this curious set of events?
01:38Good morning, Neeraj. Thanks for having me. Always a pleasure to be on your show. So,
01:45market always wants Goldilocks, right? But you may not get Goldilocks all the time. So,
01:51the market wants the U.S. economy to slow down just enough so that there is a justification
01:57for rate cuts, but not too much that it goes into a recession or something like that. So,
02:01that's something that is wishful thinking. My base case is that the U.S. continues to
02:08slow down. Because if you look at the overall macro picture in the U.S., the excess savings
02:15of the households has actually been depleted. The excess savings that we saw because of
02:21the COVID stimulus, that is depleted. So, you can't continue to expect the same kind
02:26of fraction in retail sales, services, etc. that we have seen in the last two, three years.
02:31And the farm rules data and the other data points in the last few days that we have seen,
02:36especially on the job creation side, there is a distinct sign of a slowdown. So, I think
02:42my base case is that the U.S. continues to slow down as far as the retail consumption,
02:48etc. is concerned. So, you may see some downgrades on that space. On the flip side, that may
02:55not immediately lead to technology spending because corporates have still made a lot of
03:00money. You are seeing earnings resilience in the tech sector at least so far. So, you
03:05may not see the immediate impact for Indian IT services. But for the global economy, as
03:10far as commodities are concerned, as far as general goods and services trade is concerned,
03:15you can see some slowdown. Got it. Okay. There is a slew of central banking
03:23decisions. I think we have ECB this week and the Fed may be following some of the European
03:27central banks. Based on your base case of the U.S. continuing to slow down, but we are
03:32also looking at Fed action, even if it's just 25 bps or 25 basis points in the current policy,
03:37but maybe some more in the times to come. What is your stance on risk assets in general?
03:42We will come to India valuation specifically, but I remember you telling me that central
03:47banks have been the driving force behind market moves ever since COVID lows. Does that continue
03:52to be the case or would you be skeptical on risk assets?
03:56I would be a little circumspect, but not necessarily for safe flows to emerging markets because
04:04what the banks are trying to do is make sure that the dollar does not appreciate too much
04:09or depreciate too much. But if the pace of rate cuts in the U.S. is faster than the rest
04:15of the world, then you might see a gradual depreciation of the dollar against the major
04:20currencies, which can lead to a little bit of positivity for the risk assets. But my
04:26observation over the years is that ultimately it's growth that matters. And if the rate
04:32cuts are happening in a slowdown cycle, then it does not necessarily have a salutary impact
04:37on risk flows. I think the fundamental requirement is growth. And if growth is slowing down,
04:44then you can see some volatility and some uncertainty for sure.
04:49Got it. Now, just trying to figure out what happens sectorally, and I'll come to individual
04:57themes or individual ideas in a bit, because I see some of the changes that you presumably
05:02have made to your portfolios too. So I would have some questions there. But before that,
05:08is it a turn for some of the lesser performing names which are trading at better valuations
05:17to make a bit of a comeback cyclically? And for some of the ones which have done really
05:22well in the last 12 to 18 months, to take a bit of a breather or maybe even correct?
05:27Could there be a Babel strategy of sorts?
05:32So I think the base thesis and the themes would remain the same. We have discussed this
05:38in the past, that we are more bullish on the domestic economy compared to the rest of the
05:43world. So that base case remains. Within that, we are still of the view that the financialization
05:50of savings and premium consumption will structurally continue to do better. And physical asset
05:57creation, which includes infrastructure, manufacturing, real estate, will continue to be the focus
06:02area for the markets. The other one is, of course, that new business models will continue
06:07to get involved. We'll see a lot more companies with these new age, new tech companies, which
06:12will be an interesting space to watch out for. So these three, four themes, I think
06:17nothing has changed in the last four, five months. For us, that remains. Within that,
06:22what has happened is that while, say, one year ago, two years ago, some of the manufacturing
06:29themes, defense, etc., even real estate themes, were relatively unknown and under-owned in
06:35the institutional portfolios. So, of course, they had a dream run. We saw many multi-banners
06:40in that space. But now I think we probably overshot a little bit. And typically, when
06:46you have too many thematic funds in a particular segment coming in, it means that the sector
06:50is now well-discovered. So to that extent, in the last four, five months, we have seen
06:54a slew of funds in this physical asset creation space, manufacturing, defense, etc. And stocks,
07:00of course, did run up and make a peak. So I think for the time being, while we are very,
07:06very bullish on these segments in the medium term for three to five-year view, probably
07:10stocks had overshot and there's a bit of a correction. So in the last couple of months,
07:15we have reduced allocation purely based on valuations. I don't see too much of a threat
07:19to earnings. But purely because of valuations overshoot, we have reduced space in some of
07:23these segments. Over the last two, three months, what has also happened is that we are incrementally
07:29seeing some positive commentary from the companies which deal in the rural markets. So it's
07:35not like all gangbusters and things doing very well. But if you look at some of the
07:40data points like apparel consumption in tier 2, tier 3, tier 4 towns, commentary from
07:47some of the FFCG companies, there is a feeling that probably the worst of the slowdown in
07:52the rural consumption is probably past us. And on a good basis, a good monsoon, we should
07:59start seeing some pickup. So rural consumption was something that we were negative on. But
08:04probably we are getting incrementally more positive and we've added a few, a little bit
08:09of exposure in this theme. So that's one thing to look for. I think rural versus urban
08:15consumption-wise, rural incrementally may do a bit better. Urban still is a mixed bag.
08:21Cars are not doing that well. Two areas which are rural, they are doing well. So I think
08:27rural versus urban, rural is beginning to look a little bit better.
08:31The other big one actually is financials, where we do see a theme where the market is
08:37expecting rate cuts. But the impact of rate cuts will not be uniform in the short term.
08:44So to that extent, the markets are kind of rewarding lenders, which have a predominantly
08:51fixed rate book, and that happens to be typical in the NBFCs. So within lenders and non-lenders,
08:57so on lenders, we have banks and NBFCs. Non-lenders, we have a host of companies in the capital
09:04markets, insurance, wealth management, broking, asset management space. So that's the non-lenders.
09:09So we are more positive on non-lenders to start with because it fits in with the financialization
09:14of savings theme for us. So we have more interest there.
09:17And within lenders, within banks and NBFCs, at least for the medium term, not medium term,
09:21I would say short term, we are a little more positive on the NBFCs because a lot of the
09:25NBFCs have a fixed rate book. And when interest rates come, the liabilities will get repriced
09:31downwards and immediately, assets will take a little bit of time. For the banks, most
09:36of the book is floating rate, so the assets will get repriced faster. So you might see
09:41a little bit of compression for the short term for banks. So technically, I would be
09:45more positive on the NBFCs within the lending space.
09:48Okay. So well, because that's the whole gamut of things. I want to start off though, I'll
09:55talk about defense in a bit. I want to start off with the global facing sectors, IT, and
10:00to an extent, pharma. Now, I heard you say that you believe more in the domestic themes
10:05and less on the global facing themes. But I do see, and correct me if I'm wrong, but
10:10relative to June, in July, your exposure to IT has increased from what, sub 6% to maybe
10:16around 9%. Is that true? And if so, why is that a bet when you are more focused or more
10:23constructive on domestic?
10:25Sure. So that's more of re-asset allocation based on the profit booking that we did in
10:30some of the signals that I mentioned. So for example, while we continue to be very positive
10:35on defense, infrastructure, manufacturing, et cetera, we had a huge exposure to that
10:40segment, which we have trimmed dramatically. We almost had 20 plus percent exposure, which
10:46we have in the last couple of months, trimmed down to about 10%. So that the reallocation
10:51of the 10% that we do, some of it obviously went to IT, where we are significantly underweight.
10:58So you can say we are not like very positive on IT, but we've significantly reduced the
11:04underweight position that we had.
11:06Okay. Okay. But you're not too constructive on IT. This is just a reduction. Okay. What
11:12about, and before I come to pharma, what about some of, I mean, within ITPAC, IT services,
11:21ER and D, and we have some of the tech plays which are more domestic focused, and we've
11:26seen the kind of gains that the Zomato, PB FinTech, now even a Paytm is reviving, et
11:31cetera. And then there's some of the others too. Within this bucket, I mean, and I'm presuming
11:36that even the domestic tech plays form a part of this 9%, correct me if I'm wrong again,
11:40where is it that you're more constructive on within these buckets?
11:45So I don't really treat these new business model companies as IT person, because they
11:51are more consumer companies in my view, because they face the consumer and use technology
11:56of course to reach the consumer. But for me, they are more of consumer companies. So we
12:00are very constructive. That's one of the things that we are definitely playing on, this new
12:05business models. So that's definitely a plus for us, a yes for us. Within IT services,
12:12I would say it's a stock picker's market. But in general, if I were to look at the top
12:18four, five companies we are talking about, at best single digit kind of growth. My view
12:24on the large IT services companies is that we will revert back to pre-2019 growth rates,
12:31which is again single digits for the medium term. The spike that we saw because of COVID
12:36spending on IT by US corporates is past us. So on that base, I don't think we are, let's
12:43face it, they're not doing the business models dramatically to give us the confidence that
12:48they are going to grow faster than what they did in the past. So to that extent, it will
12:52be a good, predictable, medium growth, medium expectations kind of sector. But if you expect
12:58the Indian economy to outperform the rest of the world, then you probably don't want
13:02to be very worried on the large IT companies. In the mid and small cap IT space, IT services
13:08space, there are companies which have different target segments, as you mentioned ER and D.
13:13There are companies which focus more on BFSI. So my guess is that you might see some more
13:18attraction on the BFSI spending space in the US after a long time. EIA probably will give
13:25some opportunities for some of those companies. So I would say that IT will more for us be
13:30a stock picker's market where we would like to pick stocks in the mid-cap space rather
13:35than go very over it on the large IT companies. Got it. Now, pharma is in focus. Before I
13:41go to Mihir on his thoughts on pharmaceuticals, there are some news announcements that have
13:46come in today. It will be good to get in my colleague Varsha to give us a lowdown of what
13:51have been the latest developments and what are the stocks that are moving as a result
13:55of that. Varsha, good morning. Good morning, Neeraj. So few of the pharma stocks are actually
13:59under pressure. Now, let's start with Lupin, wherein Lupin is facing a legal challenge
14:06related to its generic version of the drug, which is used to treat kidney problems. Now,
14:10the original maker of this drug, which is Otsuka, is challenging a recent court verdict
14:15that favored Lupin's generic version of the drug. And Lupin was expected to launch this
14:20product in April 2025. However, this new appeal introduces uncertainty whether Lupin
14:25will be able to launch this product or not. Now, the primary product for the innovator
14:29is contributing almost $1.5 billion of revenue for the company. So, that's the market that
14:35Lupin was actually targeting. Let's see what Citi has to say. So, Citi has a sell rating
14:39for the stock with a target price of 1700, implying almost 24% of the downside. Now,
14:46Citi says that Lupin may choose to delay the launch of this generic drug and the company
14:51may not capture as much as market compared to a typical launch that was expected. And
14:56this will actually impact significantly to the Lupin's financial numbers as Citi was
15:03expecting a 30% contribution from this product in FY26. And then we have Granules India,
15:09wherein they've got six observations from USFDA for their Hyderabad plant. The inspection
15:15was from August 26 to September 6. And this facility is actually crucial for Granules
15:20and contributes. So, major contribution comes from this facility and is crucial for manufacturing
15:26finished doses and the intermediate products. And it also supports global operation for
15:30the company. We don't have the revenue contribution, but we do have the capacity. It has a capacity
15:35of almost 23,200 tons for intermediates and 26 billion units for their finished doses.
15:42Then we have Suvin Pharmaceuticals, wherein USFDA conducted inspection for their subsidiary
15:47plant, which was categorized as VAI, that is voluntary action indicated. That means
15:53that USFDA has found some lapses, but those are not severe enough to take any kind of
15:58action. And the company is therefore expected to take the voluntary actions for this regulatory
16:02approvals. Thanks a lot for that, Varsha.
16:06And here, Pharmaceuticals, the price action seems to suggest that there is a bit of flow
16:12into some of the specific pockets. But the US generic makers have already had a rally
16:18in 2023 too. Are you constructive or are you part constructive? Would love to know.
16:23Pharmaceuticals, we are constructive now, compared to say four months ago. Couple of
16:30things. Structurally, the sector did go through its ups and downs in the last four, five years.
16:36But I think the worst of the generic pricing pressures are most likely past us. So that's
16:42one good thing for the generic company. But I think post-COVID, what has also happened
16:46is that a lot of companies are now looking for the CDMO opportunity for India, the CRO
16:54opportunity for India, because like it or not, people have realized that we need to
16:59for the sake of security, diversify away from China. And China is really big on CDMO.
17:04So I think apart from the generic opportunity, the CDMO opportunities have also opened up
17:09for Indian pharma companies. And that's the reason why we do think that in the next three
17:14to five years, this sector should do quite well. The good thing about the sector is that
17:18you also have companies with predominantly domestic exposure. So there's a wide basket
17:22to choose from. You can choose companies which are more like FMCG companies because they
17:28go to the local markets. You can choose the generic companies, or you can choose companies
17:33which are in the research and CDMO space. So there's a whole gamut of companies to
17:37choose from, which makes it an interesting sector.
17:41Okay. Okay. And watch out for me again, because it may be a very bottom-up theme here in pharma,
17:51but also from sectorally divvied up, right? Healthcare is very divvied up. CDMO, as you
17:57said, or pure pharma, or even other facets of healthcare. Is there a first among sequels
18:02there? Is there a theme within pharmaceuticals that you like more versus some of the others?
18:08Sure. So if you look at the incremental target markets, which are opening up, I would say
18:16it's the CRO and the CDMO space, because that's something that not many Indian companies were
18:21focusing on. And this is something that's opened up in the last two, three years, because
18:26companies, the multinational companies are actively looking to source from India. So
18:29that's one space where we can see incremental action.
18:33Okay. Okay. Remember viewers, by the way, just one quick follow-up there. I don't want
18:37to make this entirely pharma discussion. One last question on China, but one quick question.
18:41There's a lot of talk of the Biosecure Act being passed in the US this week, and the
18:46impact that it could have on CRO, CDMO. Is that something which is very big, or is it
18:51something that is difficult to analyze right now?
18:54It is a significant move. You may not see the impact of it in the top lines of companies
19:02for one, two years. But structurally, it will open up a whole new opportunity. The target
19:08market incrementally can be quite large.
19:10Got it. So significant viewers, but not immediately. Nameer, one final word, and I started with
19:17macro. I'm ending with macro. The only difference is I started off with the Fed and central
19:22banks, and I'm ending with China. You look at these correlations very, very closely.
19:27I would love to know, I mean, China deflating the way it is, and the impact that it has
19:35on growth globally, because it's such a large portion of the global economy, and the
19:40impact that it has on commodities per se as well, because it's such a huge guzzler of
19:46commodities until it started deflating. What is the slightly medium-term impact
19:52that you foresee if China continues to deflate the way it is currently?
19:59Specifically for commodities you are asking? In general and in commodities both. I would love to pick your brains on everything that you think about when you think of China.
20:10Sure. So first of all, I don't believe that China GDP growth is going to come back for
20:17a long period of time, just because they have peaked out in terms of working-age population
20:23four years ago. Second is they have also created all the infrastructure and real estate that
20:29they need. So there is a huge oversupply of infrastructure, there is a huge oversupply
20:34of real estate in China. And both these, of course, are huge guzzlers of commodities.
20:39So it's not a very good scenario for Chinese consumption of commodities, and China happens
20:43to be half the market or 70-80% of the market in certain commodities globally. So I think
20:48commodity price inflation is not going to come back in a hurry. That's my base case.
20:54The other risk that you rightly pointed out is that because China needs to keep supporting
20:59its growth, and if you can't build more infrastructure, if you can't build more real estate, what
21:04do you do? So they are ramping up manufacturing, and they are ramping up manufacturing not
21:08only on the commodity place like, say, your luggage and toys and stuff like that, but
21:15they are actually going high-tech also. So that, I think, in terms of deflation will
21:20continue structurally, and you will see China becoming more dominant. The hope is that,
21:26of course, companies like India, Vietnam, etc., will come up as alternate manufacturing
21:32base to China, but China is not going to let that go easily because they also need to keep
21:39growing. So it's going to be a race, and while we are very positive on Indian manufacturing,
21:44etc., it's not like it's going to fall in our laps without us doing anything. We really
21:49have to work hard towards it.
21:51Mir, just a final quick 30 seconds or 60 seconds. If China does expand its manufacturing
21:57capacities the way it did in the past, or maybe more than that, and even if there are
22:02duties, if goods which are cheaper land in neighboring countries in a much lower cost,
22:09then it has an impact on product price inflation for manufactured products even in India, right?
22:15Even if there are duties on Chinese imports, does that therefore make the attractiveness
22:20of the Make in India story slightly lower?
22:23See, we have to be smart about it, and I think the government also realizes it. So you have,
22:29you know, for example, of course, duty is there. We have to be smarter about the free
22:34trade agreements that we are signing. For example, you can't, you know, let other countries
22:38act as a conduit. And third is that there are non-tariff barriers that also what we
22:44have seen from time to time that the government used like BIS hallmarking, etc., which kind
22:49of is not, you know, which makes it a bit difficult for Chinese companies to import,
22:54etc. So I think there is awareness within the system, and PLI is another way of countering
23:01it, you know. So on one hand you have tariffs, and on the other hand you have kind of PLI
23:07incentives for manufacturing which makes it cheaper. So I think we are trying to go about
23:11it, you know, from all sides, and we are seeing good progress. At least the last two,
23:16three, four years have been very heartening in terms of electronics and a lot of other
23:20sector. But as I said, you know, you can't be sleeping at the wheel. You will have to
23:25be continuously vigilant and proactive.
23:28Got it. Meer Bora, such a pleasure talking to you. Thanks so much for taking the time
23:33out and being with us, and look forward to talking to you in person soon.
23:37Absolutely. Thank you so much.
23:39All right. That's Meer Bora of TrustMF. With that, it's a wrap on this leg of Talking
23:43Point. Thanks so much for tuning in.