India Economy

Is there a case for contra investing?

Mahesh Patil | Updated on March 10, 2018 Published on July 23, 2017

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Here’s taking a close look at three sectors that missed the bull run

Three sectors have been facing headwinds over the past year and have fallen out of favour with investors. The relative one-year under-performance as of June 2017 with respect to the large-cap index Nifty is 23 per cent for the top two listed telecom companies, 23 per cent for the BSE Healthcare Index and 27 per cent for the BSE IT Index. Let’s explore if these make for good contra investment bets.


The revenue growth of the Indian pharmaceuticals industry (top 5 players) has fallen from 20 per cent-plus per annum to a high single digit over the last five years. The industry has felt the twin impact of i) increasing pricing pressures in its key markets of the US and India and ii) poor compliance standards of Indian facilities for export markets.

Cumulatively, the US and India account for around two-thirds of revenue for the industry and hence are important for growth. The Indian market, which accounts for 50 per cent of the $30-billion industry, saw new drugs being added to the National List of Essential Medicines (NLEM) last year, which led to price cuts in many key molecules across therapy areas. Exports to the US account for 35 per cent of the industry and one in four medicines consumed in the US is an Indian generic (as measured by volume). Over the last 18 months, many of the Indian companies had product or process compliance issues at the plant level. This led to slowdown in new product approvals and even stoppage of manufacturing.

While companies have worked towards resolving these impending issues, US regulators under the new Generic Drug User Fee Amendments (GDUFA) are expediting their product approvals, leading to severe pricing pressure in the existing products. The key to winning in such a market environment is to have a specialty portfolio of ‘complex to manufacture’ products that would have a long tail of revenues with high margins.

Many Indian companies are reorienting their business models towards the new realities of the market place. Earnings for Indian pharma companies will bottom in the next two quarters and that will provide a good entry point for long-term investors.

Information Technology

The Indian IT industry, which has over $150 billion in revenue, is facing twin challenges on the growth front. The changing nature of demand of the digital services and revenue pressure on the legacy business has led to deceleration of growth for the sector from 12-14 per cent in FY14 to 5-8 per cent in FY18. The higher protectionist measures by major markets i.e. the US and Europe, and lack of discretionary spending has led to slowdown in the business deal flow. This has led to P/E contraction for the sector from 15-16x one year forward to 13-15x in last four years.

Overall, the revenue visibility for the sector has reduced significantly despite the digital services having entered implementation phase and seeing rapid growth. However, for the revenue growth acceleration, the digital services should cross at least 30 per cent revenue contribution which currently is about 15 per cent.

Thus, the growth acceleration is unlikely to be seen in FY18. Despite valuations being attractive, the sector may not necessarily be an attractive investment opportunity for the next one year. However, downside could be limited, given the attractive cash generation of the businesses and payout to investors in the form of dividends and buy-backs.


The telecom sector has seen massive disruption since September 2016, when Reliance Jio (RJio) launched its services. Its predatory pricing has led to the industry data pricing collapse at a fast pace and creating data usage explosion. Incumbents too followed it. The top operator is countering aggressively to protect its turf. The number 2 and number 3 operators, Idea and Vodafone, have announced their merger. The fringe operators are seeing forced consolidation or loss of business.

After achieving annual revenue run-rate of $31 billion in the June 2016 quarter, telecom industry revenues have seen a decline by almost 13 per cent to $27 billion. and ARPU decline of more than 20 per cent.

The large listed telecom operators have seen their India business operating profits eroding by more than 25 per cent since the RJio launch.

While the near-term pricing stability has been established, one more leg of disruption is likely as RJio launches 4G feature phone. Thus, one can look at investment in the sector with a three-year outlook, notwithstanding the likely turbulence in the sector for the next couple of quarters.

The writer is Co-Chief Investment Officer, Birla Sun Life Asset Management Company

Published on July 23, 2017
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