Aditya Khemka, Fund Manager, InCred Asset Management, says a possible 200% tariff looms over pharma exports to the US though investors are currently not reacting to the proposed tariff. Pharma companies exporting to the US may face earnings downside. InCred Asset Management avoids US-facing generic companies which may face earnings challenges in the next two years. On the other hand, Khemka likes domestic pharma companies with strong brands are experiencing doub ..
What is your take on Divi’s Lab because for today, the stock is in focus on the back of the setback coming in from Novartis and of late, we have seen the stock reacting sharply to that. But it is one of those strong candidates that even after negative news flows continues to trend higher. How does this news impact the earnings and the outlook for the company?
Aditya Khemka: Entresto is a very key product for Divi’s, and will be a substantial part of their earnings. Once Entresto goes generic, some of those earnings will evaporate. But let us not forget Divi’s has done a substantial amount of capex over the last four-five years and that capex probably still has some steam left in terms of monetisation. As and when the incremental capex gets monetised, the earning growth might still not be a challenge for Divi’s.
Having said that, from a valuation standpoint, we are very cautious on stocks like Divi’s where valuations are overstretched compared to their historical averages. These stocks are trading 40-50% higher than their historical average valuation multiples and we will continue to sit out this one. For us the downside seems to be higher than the upside and hence we are not owning the company.
Let us move away from the Divi’s news flow for a bit right now and talk about the tariff implication on the entire pharma space. There’s a 200% tariff possibility even though it is over the next 12 to 18 months. So, how feasible or how realistic is this 200% because it seems too high for tariffs on the entire pharma space? Secondly, what kind of impact do you think it could have on the overall sentiment in the pharma space?
Aditya Khemka: Earlier it was 25% and then it is 200%, I do not think investors at this point are paying any heed to the tariff percentage that the Trump administration is talking about. It remains to be seen if they will at all have any kind of tariffs on the pharmaceutical space. These may be more of an arm-twisting tactic and the Street sees it as a sort of an arm twisting tactic and realistically they may not end up imposing any kind of tariffs.
Having said that, if you look at the pharma companies that export to the US, even if some tariff is imposed, then there is a significant downside to the earnings of these pharma companies and that means higher risks for an investor in the space. We at InCred Asset Management, do not hold any US generic companies or companies that sell to US markets substantially and hence our portfolio is relatively immune to this kind of a situation.
But yes, I agree that earnings are at risk. We do not know what percentage tariffs can come out. It can be 20%, it can be 200%, it can be zero for all we know. But the risk in these stocks have definitely gone up. I have not seen the reward going up.
Tell us about the overall healthcare and the hospital chains rather because we have seen consolidation in that particular sector. The companies have been announcing their capex and even the stock prices and the investors were getting rewarded because of that. Do you believe that with the kind of capex, the growth projections, and the growth on ground, the valuations are justified? What is your overall sense of the hospital chain sector?
Aditya Khemka: It has to be very stock specific. Max Healthcare trades at 100 times trailing cash flow. Apollo is trading at 60 times trailing cash flow. Whereas Healthcare Global, is 24-25 times trailing cash flow. So, I cannot really make a statement on the entire hospital space because each individual hospital stock has a different valuation metric and is at a different spectrum altogether in terms of those valuation metrics.
I would rather summarise that we are very gung-ho on the hospital space. India has a lot of scope for hospitals to grow, especially when they follow the asset light model where they lease the land and building and they do not really own the land and building. So, there is a lot of space to grow. But there are certain hospital stocks that are very expensive and may not make money for investors in the medium term. Then, there are also extremely cheap hospital stocks which can make a substantial amount of money for investors over the next three to four years.
Source Name : Economic Times