Thanks so much Hitesh bhai for the easy explanation
Which one you think between pharma and speciality chemicals has better growth prospects in coming year or two ?
Between generic pharma (export oriented or domestic) and API/CRAMS which one has better growth prospects and scope ?
Many thanks
Sir,
Many thanks for your generosity and invaluable knowledge sharing responses to others. May be i have couple of questions this time. Though the answer for them are not straightforward, wanted to learn your thought process and understand how you construct your approach towards such topics pls. You may pls ignore if it is not relevant to respond.
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Considering the business eco system in India around last few years, lot many start up culture, growth opportunities which everybody talks about, I compare/feel our self with mid of 70ās to 80ās USA. While I donāt have clear data to emphasize the above statement, wanted to get your views/thoughts how you see this pls?
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Around a decade or so before, it was a surprise to see any company to cross 1 Lac INR in MCap, now we see there are few companies reached multi trillion INR. I feel in the next decade or so, there may be a chance for some of the Indian companies to reach Trillion dollar USD in MCap. May be do you have any view on it pls, if that happens so, do you think the current front runners (like TCS/RIL) would lead the race or any other player altogether from different industry would emerge?
Thank you.
Harsha
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Dear Hitesh. I have a question that Iām hoping youāll be able to help me with. I used to invest primarily in blue chip companies. This was easy in retrospect. All that I was doing was waiting for a Big blue chip company to dip in price and then Iād buy in bulk in one go and hold for years and feel like a genius. However, the returns have always been average (not complaining) and Iāve never felt satisfied by it. Iāve never felt invested in these companies so to speak. So I decided to invest in small caps and began studying companies. However, Iām assuming since il be taking on bigger risk with smaller companies I need to change my mindset. So instead of investing the entire amount in one go Iām following a format where in Iāve divided my investment into tranchesā¦ and I only invest in companies post their quarter results. Ie if thereās nothing untoward in the result and the management commentary is good I invest my small amount and my plan is to invest in this manner for the next 2 to 3 years in these companies and then letting my investment run after that instead of just putting all my money in now. However, this kind of investing is leading me to forget all about prices since a good result equals increase in priceā¦ so I fear Iām overpaying every quarter. Should I change the method of investment? My logic is since these are small cap companies with a HUGE runway it doesnāt matter what I pay at this stage since they are undervalued as long as their growth story is intact. Also, if they crash atleast all my capital wonāt go in one shot. Waiting for quarter results reduces risks and increases my faith in the company too. This is a far cry from āwait for blue chip to drop and buyā so wanted to know if Iām doing it correctly. Thanking you in anticipation. Cheers
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And one more query if you donāt mind. How does one valuate a tech company like infoedge. They are sitting on bohemoths like 99acres, Zomato etc that could be only a matter of time away from turning profitable. Due to this their PEs are at unbelievably high levels. Do you just invest in an SIP format now with the assumption that it will explode in a few years? Or do you wait until the quarter that shows that all these businesses have turned profitable so that it justified the PE and only buy then?(though I cant even imagine the price then)
@hitesh2710 HITESH BHAI ,
Thanks a lot for ur reply .
Which of the following is the best TO play crude bounce back :
ONGC , OIL INDIA , HPCL , BPCL .
@hitesh2710 Sir, Hikal results have once again been lacklustre. Should I give the Covid benefit of doubt or is it better to exit? Can hold for 2-3 years if there is light at the end of the tunnel. Thanks.
For deepak nitrite, the main contributor to stellar profits was the high dasda prices. At some point of time this had to correct and it seems now it has corrected. But there are other levers of profitable growth for the company in the form of IPA, improving spreads in the phenol business etc. But since the upmove was sharp and incorporated a lot of expectations, the price seemed ripe for correction.
I had exited it prematurely with minor profits but it was always on my watchlist and still remains so.
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I think both the questions you have asked are beyond my capacity to answer. I donāt have much idea about start ups or their valuations. I am focussed on listed space only.
About which company will make a trillion dollar market cap, my guess is as good as anybody elseās.
@A_shah Personally I am bullish on the pharma space and in the near future, more so on export facing companies. The API space seems exciting as compared to the generic space. But these kind of X vs Y kind of questions will have many answers depending upon varying viewpoints. Key remains to be focussed on individual company and work hard on it.
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Small cap investing requires a special skill set and mindset.
The key to investing in the small caps is to understand the story in details and after doing the requisite amount of work, have high level of conviction. This only comes after doing a lot of hard work.
Its very rare to find a no brainer small cap company where one can invest and go to sleep. So whenever we find one its always a good idea to stay invested till the story remains intact. In other cases one has to keep track ot the story and decide appropriately. There will be some quarters of lacklustre earnings and wild fluctuations in stock prices. So one needs to have the stomach for these kind of gyrations.
And one has to keep in mind the fact that the base rate of small caps making it big is low. So for one company that suceeds, there are 5 to 10 that may fail and one has to have the ability to differentiate between the two.
The ideal strategy should be to buy an initial starter position to track the story and keep adding as the story keeps improving. And in the meantime if there are hiccups, one has to be able to live with the price fluctuations. You can go through @ayushmit presentation on small cap investing he presented at one of the Goa VP meets.
Regarding infoedge I never figured out how to value it and in the process missed a big winner. But one cannot win them all so better remain restricted to our area of competence.
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Thank you so much Hitesh. I am glad to see that my line of thinking is actually aligning in a similar manner to what youāve mentioned. I will go through ayushmits presentation. What got me even more interested is Iām from Goa! So Iām going to research details about these VP Meets and if itās open to new investors like me haha. Also, yes infoedge seems like such a beautiful story to be a part of. Itās current MCAP is 33 times itās income thoughā¦ thatās just crazy. I think itās the most overvalued stock in the entire stock exchange tbhā¦ I might as well go for the likes of Hul/asian paints etc in that overvalued range. So I think itās better to just leave it alone too(and cry into a pillow when it turns into Indiaās google in 10 years 
). Thanks again. I feel like Iāve found a new home in this forum. Cant really talk stock with my family or friends So I really appreciate thisā¦cheers
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Hikal to me was a big disappointment when it reported an extremely poor quarter after having promised a lot in the earlier concall. And this is the history of the management. Over promise and under deliver.
No wonder its wealth creation track record is poor. One of the things to look out for in a company with a long history of being in business and being listed is to see how much wealth it has created in the past. If a company has created sustainable wealth for investors in the past, it shows the promoters and management have what it takes to take the business places.
That is one thing that keeps my interest in companies like ajanta alive. I always had this concept in the back of my mind but has been re-enforced by my interactions with @basumallick.
Those companies that falter usually have some or the other lame excuses for poor business performance. This is not to say hikal cannot deliver, but instead of wasting my time and energy in such companies, i prefer to be in companies that actually deliver business performance.
@baba, I dont have an exact idea on how to play the crude oil game. Maybe something like hind oil exploration could be considered rather than all these psu names.
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Hi Hitesh bhai,
In cyclicals , its said that its difficult to exit and when to exit is most important .
Since pharma too is cyclical and is showing recovery after many years , Should one be careful of exiting after the story plays out or can one stay invested for the long term also (concern was due to stocks like graphite india although in a commodity sector , rising rapidly and falling rapidly ) ? So would the price fall drastically as in case of other bull run stocks after the end of bull run or would it not correct much irrespective of whenever down cycle happens as it has semi fmcg type characteristics .
In case of USFDA issues, is there time lag between two companies USFDA inspection or can there be simultaneous usfda warnings to many companies . the reason behind asking this is whether if one has more than 1 pharma companies in portfolio , whether there are chances of many being simultaneously affected
Many thanks
HIteshbhai
Reading your views has always been a learning experience. I read some time back that you have exited most of your positions except Transpek. With Markets on the tear, do you experience FOMO like a normal investor? If yes how do you deal with with it.
On a lighter how do you balance your time between practising dermatologist and researching companies, understanding technicals and responding to your fans
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@A_shah The term cyclical usually refers to businesses that have shorter time cycles like steel, metals, cement, commodities like sugar etc where demand and supply change off and on and cause similar movements in stock prices. One might argue that cement is a better cyclical looking at the overall long term track record of frontline cement stocks, but at the end of the day it still is considered a cyclical.
A lot of other businesses like pharma, speciality chemicals etc have long periods of demand supply balances and hence less volatile in the shorter term.
I think you need to go through Peter Lynchās book again to see what he lists as cyclicals.
I did not get the gist of the last paragraph. So cannot answer it.
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I was panicky in the beginning of the correction and as said before, pressed the exit button in most of my positions. But once the markets started stabilising, and I could figure out that pharma sectors stocks behaved in a sectorally bullish manner, I started focussing on them and ended up buying many of them. Since then I have not worried too much about the markets.
I donāt have the fear of missing out because I am invested with a big part of my portfolio. But I still do not have any idea why the markets should be so strong and stocks of some beaten down sectors go up at breakneck speeds.
The thing I am comfortable about is that after a long time, I can see the technicals and fundamentals aligning in a single sector and that makes investing in the sector easier. Only problem is that if markets were to crash again really hard, most things would again go down sharply and even pharma probably wonāt be spared. So I am on the look out for any loss of momentum in the markets.
Regarding time management, my view is that if some one says āI cannot find time to do this or thatā , I conclude that he does not know how to manage his time. It all boils down to time management and setting priorities in life.
I am a semi retired guy who enjoys practicsing dermatology 3-4 hours a day and do whatever I like for the rest of the day. And the latter includes all things related to investing.
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Thanks for the clarification Hitesh bhai. On what part of the cycle are we ? Can this tailwind continue for chemicals /pharma for few more years ? I mean the story can continue even if china supply starts? Can one be a long term investor in pharma and specialty chemicals?
Very True Hitesh bhai . Thanks so much for reminding as itās high time for a reread
What are the signs for loss of momentum when one should exit ?
Thanks so much Hitesh bhai for taking the time out for replying
Dear Hitesh Ji,
Request you to give your opinion on corporate governance at sun pharma. Also, I see sun pharma directord constantly creating and releasing pledges. What could be the need for this.
Thank you for your time and patience
Thank you Hitesh bhai for your response, As regards Pharma segment, I have some observations and would appreciate your response:
- Why most of the pharma companies have very average or poor return ratios, are these ratios likely to change
- Most of the pharma companies reported negative to low single digit sales growth during 2015-18, would you recall any industry trend which would have resulted in muted performance.
Lastly how do you go about identifying loss of momentum in market cycles.
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Regarding pharma cycle, it seems stocks like sun, lupin, drl etc have started moving and hitting fresh 52 week highs in response to management commentary and in some instances decent recent quarterly numbers.
The strength in the sector is masked by the wild run ups in battered names in broader markets. Some like alembic, aarti drugs, solara, laurus etc are showing very good strength.
I think we have seen a start to the uptrend after reversal. How long this continues is anybodyās guess, but once a sector that is in the dumps for nearly 4-5 years turns, it doesnāt give up easily.
We need to see the numbers and commentary from frontline companies for next few quarters. That should give a better idea about what to expect.
My theory is that a lot of domestic facing companies will have poor q1, and the prospects of even q2 are not certain. In this backdrop if we see good numbers from pharma space, there could be a strong run up then. Till now the bad quarterly numbers from some companies in pharma space have been very well digested by the markets and thatās an encouraging sign for the sector.
@sarthakkumar19_, the query has already been answered few posts back. No need to keep repeating.
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Domestic pharma business is a high roe business. But USA exports entail a lot of r&d costs and that takes some shine off the returns. Plus compliances related costs are also high. But still some companies like alembic have good return ratios, inspite of high r&d costs. Cipla is on a journey to improve its roe.
Last few years (4-5) have been tough for export facing pharma cos bcos of the excesses committed in the past. E.g sun pharmaās acquisition of ranbaxy. Excessive capex in other companies.
Basically what happened was that prior to 2015, Indian companies minted money by exporting drugs, especially to US by getting high margins and hence high ROEs. But as usually happens, high returns attract high competition which after a time affects margins and ratios, and sooner or later those who have committed excesses suffer, and often go bankrupt, thus reducing competition. This again leads to a cycle of improvement in margins as competitors reduce and the field becomes better in terms of lesser competition. All these up and down cycles take time, and stock prices move in tandem or often in anticipation, as precursors.
Loss of momentum in market cycles is often visible by signs of varying nature. Most common is lack of positive price response to what is usually very good news or data points or events. At the fag end of bull run in most companies, there is usually a sharp parabolic rally, and inspite of that kind of rally, most market participants are in agreement about the merits of investing in the same company. Unanimity in bullish prospects for a company/sector is usually a warning sign we should be on the lookout for. Inspite of knowing this at times we all get sucked in by the price momentum.
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