Morgan Stanley favours Indian drug firms, shuns banks

Morgan Stanley favours Indian drug firms, shuns banks

Mumbai: Morgan Stanley believes Indian generic drug makers are good bets for investment because of the world’s drive towards bringing down healthcare costs and making medicines affordable, a fund manager said on Friday.

“My sense is that it is similar to the opportunity that we had in IT way back in 1999," said Jayesh Gandhi, referring to India’s information technology sector, which became the hub for outsourcing to companies and governments across the world.

Gandhi, who manages about $100 million in India for the US money manager, said Indian drug firms were available cheap at 6-7 times their price to earnings multiple and could show an earnings growth of 30-40%.

He was also overweight on utilities and consumer goods, but saw bad loans posing a risk to banks’ profitability in 2009-10.

The fund manager slashed bank bets to 10.11% of Morgan Stanley ACE Fund’s assets at the end of July from nearly 25% in December and has more than tripled holding in drug firms to 7.14%, data from fund tracker ICRA showed.

“One thing which is changing very, very significantly is the importance of Indian generics in the supply of global pharmaceuticals industry," said Gandhi, who holds Aurobindo Pharma, Cadila Healthcare, Dr Reddy’s Laboratories and Jubilant Organosys.

He said the US generics market, the world’s biggest, will double in size to about $100 billion in five to seven years, creating at least a $10 billion to $15 billion opportunity for Indian drug makers.

US President Barack Obama’s drive for healthcare reforms and lower cost can only be done by using the cheaper Indian generics, he said.

The world’s biggest drugmakers are also eyeing Indian firms to gain access to emerging markets and cheap production, as well as to retake some of the business they have lost to inexpensive copycat versions of their blockbuster drugs.

Gandhi said he had exited state-run banks as he expected them to underperform in 2009-10.

“You are in a situation where the profitability of banks will come under stress," he said.

Loan growth is not picking up and banks no longer command the pricing power they enjoyed last year, with companies now able to access world equity and bond markets for funds, he said.

Corporate loans have been restructured and they now make up 5-7% of the loan book of all public sector banks, he said, adding bad loans will rise in the next 18 months.

With policymakers leaning on banks to lower interest rates and increase loans to needy sectors to boost growth, analysts fear this may saddle lenders with bad loans.

Net interest margins are under pressure and costs are rising. “From earnings point of view, banks will have significantly tough 2009-10," the Mumbai-based executive said.