Financial Market

morgan stanley: Morgan Stanley’s Sameer Baisiwala on how realty and pharma sectors will fare going ahead

“Coming to pharma, companies which are able to break the code for that part of the business are doing very well. Therefore, one has to be in the right areas to really do well in the US,” says
Sameer Baisiwala, India Pharma and Property Analyst, Morgan Stanley

On the realty sector

The residential part of the realty sector is on a good recovery path. We are about three quarters already into this recovery. We were facing a fair bit of downturn. Over the last five to six years, property prices were flat, volumes were down almost 25% versus the preceding five years. So, there is a lot of pent up demand. All the right ingredients for volume recovery are in place and we should see a few more quarters of growth as we go forward.

Second, the bigger challenge for the sector is the input cost inflation. Prices of various raw materials, labour costs etc. are moving up. The developers have started to take price increases roughly about mid single digit to protect the margins and that is the second important theme that we are going to see over next few quarters.

The final point I would make is companies have done well to maintain and improve their balance sheets over the last three-four years and therefore we should see a new project acquisition cycle over the next few quarters.

There are two pockets of realty. One drives its fortunes mostly from the IT related workforce in the south the other one is more of financial market related in Mumbai. How are you looking at the valuations of these two pockets & their balance sheets?

Balance sheet first. Over the last three years, the companies have taken a lot of steps to deleverage and quite significantly so it has come about through internal accruals, sale of assets and equity placement. Today their balance sheets are in a pretty good state.

Second point here is while the operating cash flows are on the rise, it is a good confluence to have and we should see the benefit of this translating into higher capex spend and new project acquisitions.

Further, the interplay between say South India realty players versus say a financial capital Mumbai players, where we are in a recovery mode is a very broad-based recovery. It is not only about most of the metro cities, even in tier one cities, we are seeing this recovery. There are various micro markets within each of these cities and across the ticket sizes whether it is low income, mid income or luxury or premium products. I would not make too much distinction between one versus the other. It is fairly broad based.

How is the appetite for realty plays among the institutional clients?
The investability of this sector was very low three or four years back. Their representation on the capital market was very shallow and under 2% of the overall market. However, over last three to four years, as we have seen new listings, most notably new IPOs, these stocks have moved up.

Now they have a $40-$50 billion market cap to play around with. So, there is a bit more investability in the sector.

The second point here is given that business models are looking more robust, sponsorship is much better than what we have seen a decade back, in this current toppy cycle, all are making this to be a relevant sector – a sector that people are looking at fairly positively.

How are you analysing the comparative landscape in US generics space?
The US business is going through pressure. I would just break this business into two parts; one is the plain vanilla part of the business which is mostly oral solids and second is getting into more complex generics. Oral solid is a very tough business at the moment and they continue to see a fair bit of pricing pressure and that is coming from competitive intensity.

There are still more suppliers per molecule in the US market which keeps pulling the prices down. The number can be anywhere from mid single digit to high single and some of the companies which have product concentration are even seeing early double digit price erosion and that remains the tough part of the business.

Second is the complex generics which are higher hanging fruits and those are very difficult to get to. But the companies which are able to get to them are complex injectables, inhalers, biosimilars. I would put specialty also in that basket. So companies which are able to break the code for that part of the business are doing very well. Therefore, one has to be in the right areas to really do well in the US. But overall, the business is going through some tough times and I do not see this getting any better anytime soon.

What do you have to say about the pharma space? The pharma API segment has more midcap companies but a few largecap monopolistic kinds of businesses seem to have entered difficult times. How do you see margin pressure related issues and the top line visibility in some of these pharma API plays?
API is really the raw material, the active ingredient which is the potent part of the medicine. It is a very strategic part of the whole value chain and the way to really do well over here is to create moat around the business. The companies which are able to gain global leadership by virtue of the scale and cost tend to do well but at the same time, this is a B2B business and this to some extent is a commodity business because there can be multiple players per product.

Therefore some products go through the life cycle and whenever they are on a downturn, those companies end up not doing well during that period. The trick here is to dominate a few molecules, a few categories.

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