‘Inflation and pressure on US cos to invest domestically may keep FII money away'

Edited excerpts:

How are Indian pharma companies placed now?

India’s pharma exports are primarily into generic drugs, which are currently outside the ambit of the tariff order. Generic drugs see high price erosion as they come once the innovator drug’s patent expires. Even if one were to assume a similar tariff could eventually come to generic drugs, its pricing would continue to be competitive. India has a few CDMO players (contract manufacturers) who cater to US-based innovator pharma companies across the life cycle, including commercial manufacturing. If innovator pharma companies are forced to put up plants in the US, future drug pipelines for such companies could be impacted.

Foreign institutional investor (FII) selling is continuing. How does it look for India?

For FIIs, each market is like a stock. They will enter and exit one if the valuations favour this. For example, China, a year ago, was trading at an 11x multiple; FIIs entered China, and now the country is trading at a 13x multiple. Things have not been very optimistic for India, especially when the markets have given neutral returns in the last year on the back of single-digit earnings.

The good part is that India has decent resilience in terms of domestic money. The recent GST cut is putting more money in people’s hands so subdued growth is coming back at a decent level.

How much of the GST cut is going to flow in the earnings of listed players?

We may not see the full impact of GST being passed on to consumers, as there will be some leakage and input tax credit adjustments. But we can expect a 5-9% reduction in prices of certain goods and services. The impact will be more on discretionary consumption, where some strata might upgrade to premium stuff if the prices of the routine products become cheaper. The real impact will be on discretionary items like cars, consumer durables, insurance, and investments. We are optimistic about insurance and asset management, as well as sectors like autos, auto ancillaries, and consumer discretionary.

The US Federal Reserve (The Fed) has recently cut rates. Usually, when rate cuts happen in developed markets, FII money flows into other markets. What could happen now?

Broadly, the thumb rule is that when interest rates go down in developed markets, capital tends to chase yields in other markets. But, in today’s world, with geopolitical uncertainty, it might not play out the same way. Pressure from inflation and tariffs, which complicates the situation. There is also political pressure for US companies to invest more domestically, which could keep money in the US. So, how much flows into other markets, including India, is uncertain right now.

What sectors look good?

Housing finance companies look good as credit costs may normalise. Insurance companies, where growth has been subdued, might benefit from the adoption of new technology like GenAI. Auto ancillaries and discretionary sectors also look interesting.

We also like banks. Historically, banks have seen periods of valuation decline, but those cycles can reverse as the economy picks up. Their efficiency and leaner operations, especially after dealing with non-performing asset (NPA) challenges in the last decade, position them well to benefit from faster economic growth.

How do you look at the H1B announcement? Does that change your stance on IT companies?

Indian IT companies have materially reduced their dependence on H1B Visas over the past few years. Even if we assume an increase in local hiring or increased reliance on higher-cost US-based sub-contractors, we don’t see a material impact on earnings. We continue to like IT service companies for their ability to execute large-scale software implementation and maintenance of large IT systems cost-effectively.

Do you see any big risks for the market from here on?

The impact of US tariffs, if counterbalanced with free trade agreements (FTAs) with the UK, may be manageable. If our markets aren’t diversified, then the impact will be higher. The bigger risk would be if US tariffs or protectionism hit our services exports, especially IT, which is significant. But the government is trying to offset shocks with tax cuts, GST reductions, and liquidity infusion.

Are export companies diversifying from US markets?

Industries like jewellery, textiles, etc., are very labour-intensive and exposed to US demand. Some companies are diversifying markets, but it takes time. Those with small existing exposure to other markets are scaling it up. It’s a mixed bag; it’s too early to conclude, but diversification efforts by management are underway.

The Securities and Exchange Board of India (Sebi’s) consultation paper on categorisation says that no more than 50% of a scheme’s portfolio should overlap with other schemes. If it becomes a circular, how do you see new fund offerings (NFOs), mostly thematic NFOs where the overlap is more?

Regulators want transparency and fewer overlapping schemes. Data would have suggested that many thematic funds launched recently had high overlaps with existing portfolios. It’s the right step for investor protection, as there is no point in showing banking and infrastructure as two different funds.

Will it reduce the number of NFOs?

NFOs that genuinely bring differentiated value will continue. New asset management companies (AMCs) will still launch basic category funds like large-cap, small-cap, mid-cap, and flexi-cap. However, the number of overlapping thematic NFOs might decrease. This could also encourage more innovation, with funds based on new ideas or sectors, rather than duplicating existing ones.