Anupam: Hi Listeners, we at Aditya Birla Sun life Mutual fund have come up with a special podcast series called MF 101 in collaboration with Bloomberg Quint. MF 101 is an informative series that will help you understand the recipe behind mutual fund investments and what’s more? It’s coming from the chefs of the mutual fund buffet table. From the very own fund managers and analysts who are the manufacturers of the funds that help you realize your investment goals.

HI, I am Anupam Gupta @b50 on twitter and in this episode, we are going to discover the recipe behind ‘Benefiting from the Consumption Sectors’ from our guest Chef ‘Mr. Dhaval Shah Fund Manager at “Aditya Birla Sun Life Equity Hybrid’95 Fund” at Aditya Birla Sun Life Mutual Fund. Dhaval welcome to the show!

DHAVAL: Yeah hi good evening.

ANUPAM: Thank you! Before we start our discussion tell us something about yourself and how you started your career how you got into big bright world of investments.

DHAVAL: : Sure, so you know I did my MBA in finance from Mumbai University as well as CFA from AIMR US and I have been into equity markets for the last 14 years. I started off as a research equity analyst with Reliance Capital Asset Management, worked there for 7 years then shifted to Morgan Stanley. Worked in Morgan Stanley Investment Management as you know as an Assistant Fund Manager managing one of the funds and from there on went to Edelweiss security for a strength of a year and then I have spent time with Birla for the last three and a half years.

ANUPAM: Let's start with a very basic introduction to India as pharma sector we know that there is a domestic part to it and an export part to it what does that look like and similarly the consumer durable sector and the electrical sector just a very basic intro for our listeners. 

DHAVAL: Sure, so let's start with the pharma sector and if you look at globally the pharma sector is around 1.1 trillion dollars of sales annually and you know where does India stand in that context. India total sales on an annual base is somewhere at around 35-36 billion dollars. Of which half of it is actually coming from domestic sales and the remaining part is actually exports. You have to look whether India has a competency to become a you know global scale player in pharmaceuticals, like what does typically become incase of IT you know where we scaled up our overall exports based over 100 million dollars. Incase of Pharma we have skill sets we have the low-cost efficiency to drive that and that is where you know we can actually become an export hub for the overall global pharma market that we are trying to look at. In that context pharma is very exciting space, both the engines of growth actually kicking in equally well on an overall context that we are trying to look at.

ANUPAM: You mention this generic thing you know because this is a very important thing of pharma because generic and then there is branded because one is generic medicine and one is branded medicine. I know that there is a difference between the two. I am totally confused. What is a generic and what is branded?

DHAVAL: If you are looking at any medicine you know, and it has a brand name. Say for an example just for an example say very common medicine you know which you take for a high temperature is Crocin but what it contains is the molecule which is known as paracetamol. So, if anyone is saying at a medical store that I want a paracetamol. He is actually asking for a generic drug which other than the brand which can be many other brands is in a similar name where you can actually go ahead and look at. But if you are asking for a specific brand then you know that becomes a branded name that you are trying to look at.

Anupam: So, Cadbury though is like a brand. Chocolate though is like generic.

DHAVAL: Absolutely! You got it right.

Anupam: Go on, Please.

DHAVAL: But you know when you have to look at it from a global context what typically happens is, many of these multinationals over the years has spent top dollars in R & D, so when that drug goes patient you know then at that point in time lets take an example of US. They encourage that more and more companies can come out with a generic version of that drug so that the overall healthcare cost for the economy comes down and that is where you know the first generic player comes in and actually makes that drug generic and you have many other players actually following out. So, that global context is that it’s a patented and an unpatented drug is actually known as the generic drug. where you know many players can go ahead and manufacture it after the patent has expired or the patent is challenged, and it is invalidated you can actually go ahead into that.

Anupam: Great, consumer durable does that mean a durable consumer. That doesn’t I am sure. What exactly is that?

DHAVAL: It is very interesting that you know across the world we have seen that as various economies have actually crossed a per capita income of about 2000 dollars where we are actually right. In India, US was at a similar level in 1950s and you know Europe was there at similar levels in around 60s. China was there you know around late 90s early 20s that we are trying to look at. Invariably, we have seen that you know that increase in per capita is spent more on consumer discretionary items. So, you typically go and buy 2 wheelers, 4 wheelers. But also various consumer durable items, the first thing to enter your house will be the refrigerator followed by washing machine and then you know an AC that you are trying to look at and that is where you know interestingly in India today where we are at that cusp where consumer durables as a sector looks an investment opportunity from the next decade or possibly two decades where you know based on per capita income increase you will find a lot of Indians typically buying more and more of consumer discretionary items.

Anupam: So, Electrical sector actually sounds like its linked to the consumer durable sector so what exactly is electricals?

DHAVAL: Yeah, so electricals is an added sector to the overall consumer durables portion in the sense that you know if you require an AC at home or a washing machine at home you will obviously require wires to connect to it, you will require switches for it and then you will require MCBs to support all of that. So, all of that actually comes into electricals which is there. There is also an added parameter of lighting which is an electrical portion which we are trying to look at which is by itself a 20,000-crore separate segment that we are trying to look at. So, the overall consumer durable store electricals are somewhere at around 1.8 lakh crore market for India and that is growing at a very healthy rate of someone around 15% CAGR. So, you know many of these listed growing at a higher rate than the overall industry that we are trying to look at.

Anupam: So you have got a 20-billion-dollar pharma sector, you have got a 30-billion-dollar consumer durable plus electrical sector right.

DHAVAL: Yeah, the pharma sector is at 35 billion. Almost similar

Anupam: Almost similar and pharma is 50-50. 50% Domestic, 50% exports and but I am guessing consumer durable and electrical is primarily domestic. The demand from there itself is growing to so let’s get into each sector specifically in terms of where it stands today right because pharma is interesting right? Pharma if I recall in the late 90s just and you had in fact said that IT gone up to billions of dollars of exports. Pharma is where it is. Pharma even today is grappling with these issues you know every once in awhile you hear off a US FDA inspection at a plant and the plant shuts down or something in the stock’s prices also. Tell us what’s happening there specifically in the pharma sector. Almost similar and pharma is 50-50. 50% Domestic, 50% exports and but I am guessing consumer durable and electrical is primarily domestic. The demand from there itself is growing to so let’s get into each sector specifically in terms of where it stands today right because pharma is interesting right? Pharma if I recall in the late 90s just and you had in fact said that IT gone up to billions of dollars of exports. Pharma is where it is. Pharma even today is grappling with these issues you know every once in awhile you hear off a US FDA inspection at a plant and the plant shuts down or something in the stock’s prices also. Tell us what’s happening there specifically in the pharma sector.

DHAVAL: Sure, so when you take the last ten year view you know last two years have been pretty challenging for export oriented guys but the previous 8 years to that you have seen that many of the export oriented guys have actually grown at 25% of a CAGR, largely gaining market share in developed markets like US, Europe and some bit of it even in Japan. But last 2 years this sector has been hit with a lot of headwinds. The first headwind which actually came was US FDA so to know put of context out of 1.1 trillion-dollar industry almost 450-billion-dollar worth of drugs every year gets consumed in US. The point I was trying to draw is that US is one of the largest generic markets that you know many of the pharma companies have actually attacked over the last ten years. If you see invariably any of the pharma companies today right from 30-60% of their sales actually come from US so that is where US and US related regulations which are issued by FDA have become extremely important to understand and that is where two years back we saw a lot of Indian Pharma Companies had various plant issues which had actually come up largely because of the fact that the expectation of US FDA had increases a notch in terms of the compliance standard which was required out of them and that is where over the last two years many of these companies have either warning letters or import alerts. Warning letter means that your plant giving you a warning and we will not approve incremental products till you get your house in order and an import alert says that no product whatsoever will come to our land till we are satisfied with whatever you know you have actually done to your overall plant and in terms of the compliance standard that is required from our end and meanwhile there was another important thing that actually happened in US markets was that earlier you know the whole of buying in US used to happen by 7 large GPOs which are used to buy all the generic medicines for the whole of US. They got consolidated because of you know their own pressures to three. And that is when 7 large companies used to buy generic medicines and each company will have either mostly 2-3 guys from which they will source so all of a sudden you know those 14-20 slots got shut down to 6 slots and that is where it was a big pricing pressure where it was generic companies had to face over the last 2 years.

Anupam: Okay, consumer durables and electricals. Anything there, how was the present there how were they. So, I think GST came about two years ago how have they managed a transition any headwinds out there any issues out there that you see in terms of either the demand not coming as we had expected or anything there just to compare it to the pharma sector.

DHAVAL: Sure, so on the consumer durables side if I were to look at then GST had some kind of issues you know in terms of quarterly variations which was there. Also, you know last year they had some kind of issues with erratic summers in terms of summers you actually not planning out as per the expectations as hot as expected that’s where you know many of them had anticipated a very good demand which is actually not panned out. But importantly you know when you look at consumer durables to electricals you know you have to look at it from a penetration perspective of how various sub segments have penetrated in the overall households so you know if I were to look at you know the most penetrated year as refrigerators where one in every three houses actually have 30 % kind of a penetration washing machine is actually at around 11% and the sub segment like AC is at around 5% kind of a number so that is where we still think that you know it can have some kind of a quarterly volatility and you know we have seen every 3-4 year one season may go bad but if you were to look at from a 3-5 year perspective it’s a hypothesis where on a secular basis we can see that you know the penetrations will keep on increasing based on per capita increase and you know various companies are driving that in terms of you know adding more to the dealer network and further penetrating to tier 3 tier 4 town, so that would help in terms of overall you know framework in terms of increasing over penetration for consumer durables.

Anupam: Dhaval we have covered the potential we have covered the present we have covered certain issues also that are facing some of the sectors what is outlook how does Aditya Birla Sun Life Mutual Fund look at all 3 sectors going forward in your view.

DHAVAL: Sure, so let’s start with pharma you know within pharma we have a very nuance view, when you look at from the next you know 12-18 months we think that you know domestic oriented company where majority of the earnings are actually driven by domestic sales and profitability are at a much better wicket verses export oriented companies because one thing that we do at our AMC very religiously is that we respect data a lot just because things have corrected 50 % on a stock price basis is not very important as much as the data which is in front of you in terms of trying to suggest that what is the pain point that the industry is experiencing and whether that is out so to our assessment you know that export oriented companies the pain point will still remain there for the next couple of quarters and that is where we would think that domestic oriented companies which are itself having 17-18 billion dollar overall base growing at somewhere around 10-12% and for the market growth rate that they have are investment opportunities within that there are couple of MNC companies wherein they are actually delivering great patented products within India. They would tend to do well and that is where you know we are far more excited on domestic oriented franchises and less excited on the export oriented franchises from the next 12-18 months perspective we may change our view if we think that the data on the table changes and which is where we find that the generic companies exporting to various nations have either got their pricing power back or there is a consolidation within them and that is where they are able to scale up volumes meaningfully then we would want to look at export oriented companies as well as in the overall portfolio framework that we have.

ANUPAM: Folks that is a wrap on our show. For more such interesting know how’s continue listening to our Podcast MF 101 or simply follow the blog page of Aditya Birla Sun Life Mutual Funds, Bloomberg quint, IVM podcast or wherever you get your podcasts from. If you have any queries or some specific subjects you want us to talk about, with regards to mutual fund investments, reach out to us on our Twitter handle @abcabslmf. Thank you for listening to this podcast!

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