In your interest.
Online Personal Finance Magazine
No beating about the bush.
In an exclusive interview with Moneylife, Vetri Subramaniam, Equity Head, Religare AMC, gives his perspective on the current market rally and where the markets are headed. We present to you the first part in a three-part series of the interview.
ML: Are we witnessing the start of a new bull market?
Vetri Subramaniam: It’s like asking somebody in 2003 that whether they thought they were in a multi-year bull market. I don’t think anybody knew at that time and it’s the same this time. The one parallel is that at the lows in 2003, the Sensex was trading almost at 10 times one-year forward earnings. At the lows of March this year or October last year, the market was in a similar kind of trough valuation. So that would suggest that in some ways those lows were significant but whether that is necessarily the start of the new bull market is a million dollar question. I say this in hindsight but not with foresight.
The only thing that I believe is actually comparable is the fact that valuations in March this year or October last year on the forward basis were similar to where the previous bull market started. Now whether you want to interpret that as a new bull market, or the last 18 months was a fall in the bull run that started in 2003, is hard to say. But the important point to keep in mind is that the valuations were at the trough levels that we have seen historically and in a way the price levels were suggesting that all the macro bad news had been discounted. I don’t think you answer that conclusively unless you answer with hindsight.
ML: How different is the current rally from 2004-06 or 2006-08 periods?
VS: The beauty of 2003-2008 period was that you had all cylinders firing. Will we get all those cylinders firing all over again? I have my doubts.
The only piece that is in place now is the local piece. The global piece is not really there. But about 40% of our earnings are not driven by the India story. It’s driven by what is happening at the global level. Reliance’s refining margins are not determined in India, they are determined globally. Steel prices for SAIL or TISCO are determined globally and not locally. The software sector is dependent on the US situation. So 40% of your earnings are affected in one way or the other by global environment and global growth.
Let’s face it, at the end of the day there is nothing in the last six years which tells you that we are anywhere decoupled from the rest of the world. It seemed that we were decoupled from the world during 2003-2008 but as somebody pointed out that even sub-Saharan Africa recorded a stellar growth till 2007. There is no data indicating that we have decoupled very significantly from the world in terms of growth rate or in terms of the way asset prices behave. And given the fact that the global scenario remains gloomy, at some point it even clouds the visibility of going back to 9% GDP growth. Can India go back to a 9% growth rate in the absence of a conducive global environment both in terms of growth and capital flows? That’s pretty much impossible. In that case, the current forces are very different from what fuelled the previous bull run.
In general, global cues remain very important because if the last five years have been correlated, last 18 months have been even more correlated and the last six months have been incredibly correlated in terms of the way prices are moving across all risky asset classes. That poses its own challenge. At the end of the day while you look at the macro factor and feel positive, you are not seeing the kind of lack of correlation that you would like to see in the behaviour of asset prices and that suggests to me that there is some level of risk and therefore global cues can create downside risk as much as they can create upside reward.
I think what the events in the last 18 months have shown me is that India’s secular growth story has been reinforced, given the way growth has come back so strongly. But it is very difficult to extrapolate that economic trend into a conclusion that the market concerns are off to the races again, as they were in the previous stretches of the bull run.
ML: Is there too much of complacency not only about global growth but also about the domestic growth situation?
VS: Let’s look at what goes into the 9% growth. The very first year when we had 9% growth RBI slammed the brakes in July 2006 saying that the growth is too fast; we don’t have enough productive capacity to support this growth level. They started tightening in 2006 and we got two years of 9% growth despite that because the capital flow was strong and because exports were strong. Today we are in an environment where the exports are not strong. Capital flows have picked up but going back to those levels I think is a bit of a stretch. Have we actually solved any of these so called supply constraints that YV Reddy so famously talked about three years ago? I am not sure. I haven’t seen any data indicating that the constraints have changed. Therefore 9% is a nice number to talk about. But is it a practical number? I don’t know. Presuming that the global environment continues to be difficult, the more practical number is 8% in the first year out of the slump and then settle back at 7.5% sort of a growth rate.
Troubled winemaker’s bank accounts seized by sales tax department for non-payment of dues to employees
India’s oldest winemaker Indage Vintners, we learn, has not been making payments to suppliers and service providers ever since the beginning of this year. In a business that is dependent on a big public profile, the inability to pay its dues was the first indicator of how cash starved it is. Soon afterwards, it stopped paying employees, forcing some of them to approach the police. It was the vision of Indage's founder Shamrao Chougule that brought quality wine and champagne to India and it is his dogged effort that led to the discovery that large parts of Maharashtra have the perfect climate and soil to produce quality wine grapes. However, when it comes to running its operations, the group has always had its sharp peaks and troughs.
Several years ago, the company was pulled out of a financial mess through a generous restructuring of loans. This allowed it to take full advantage of the boom in wine sales that coincided with five years of India's blazing economic growth until 2008.
However, a series of over-zealous international acquisitions that went sour, expensive new brand launches and the prolonged lull in the market following the economic slowdown of 2008 have put the company’s finances in a precarious position again. In May, Indage closed down several regional offices and stopped accepting supplies from its several small wineries. Soon its market position began to decline and its nearest competitors, Sula and Grover began to eat into its market share.
Earlier this week, Indage landed into even more trouble after the West Bengal sales tax department seized its bank accounts for non-payment of dues. Apparently, any balance funds remaining in the account as on September 2009 were remitted to the sales tax department.
Moneylife had been trying to contact the company management for the past few days, but no one was willing to respond to our queries about the state of its finances. Vickram Chougule directed us to speak to his brother Ranjit Chougule, who did not respond to our calls. Earlier, Indage’s senior management had sought to play down employees’ fears saying the financial situation was only a temporary aberration and that the company would soon come out of it.
–Sanket Dhanorkar [email protected]
The Indian government has loaded the pharmaceutical industry with fiscal sops and other goodies over the years to prop up its growth. Particularly, the largesse given to it to strengthen its research and development (R&D) base to compete in the world market seems to have yielded nothing. It is disappointing that the pharma industry spent as much as Rs15,000 crore on R&D during the past five years without producing a single new molecule. In sharp contrast, the US drug industry spends $55 billion on more than 450 drugs every year to come out with 26 new molecules. A McKinsey report says that Indian drug industry’s R&D costs are 85% lower than the US—thanks to cheaper talent—yet it has not come out with a single new molecule.
The Indian drug industry like the IT sector is knowledge-based and can grow exponentially as it has a vast pool of talent. During the past few years, the drug industry has made a transition from depending on reverse engineering—low knowledge based drugs—to R&D-based drugs aided by high knowledge ingredient. The industry has also realised that talent could attribute substantially to success in R&D.
In fact, a few drug companies such as Ranbaxy, Dr Reddy’s Laboratories, Biocon and Sun Pharmaceutical started research in 1993-94. But it was only during the last five-six years that investment in R&D received major impetus. During 2004-2009, pharma companies have spent $3 billion (Rs15,000 crore) on R&D. These companies spend around 7% to 8% of their sales turnover on R&D now, up from around less than half percent before 2000. Yet this looks miniscule in comparison to US or European companies which spend around 20% of their turnover on R&D. Yet Indian drug companies have not come out with a new molecule. More than 70 molecules have entered phase I of trials but only four-five molecules have entered phase III. Ajay Piramal, chairman, Nicholas Piramal says, “My dream is to develop one drug.” Piramal knows that drug development is very expensive in India, yet economical in comparison to the US. He says, “In the US, it costs around $800 million but in India it should not be more than $100 million.” The question then is: why in India have we not been able to develop a single drug out of $3 billion investment in R&D?
Ranbaxy has invested Rs 2,500 crore and Dr Reddy’s Laboratories Rs 2,000 crore in R&D efforts. Cipla, Cadila, Lupin and Sun have spent Rs 800 crore plus each in R&D. Another 12 companies have spent over Rs 200 crore each in R&D. Piramal, a late entrant in drug discovery with seven years experience, hopes to make a breakthrough in 2010-2011. Nothing hopeful has come from Ranbaxy, Dr Reddy’s, Biocon and Sun Pharma—all companies with over 15 years of R&D experience. The reason is simple. A major part of R&D expenditure has gone to reverse engineering, generics, contract research, clinical research and little to new molecule research. In the US, 80% of R&D expenditure goes to molecule research. That is why the US has high productivity in the entire chain of the molecule development cycle.
Low productivity, inefficient clinical research, low study curve and low learning curve, inadequate networking, long-term finance unavailability, low innovation and testing facilities, lack of trained investigators, no advancement in instrumentation, lack of stringent quality in CGMP (Current Good Manufacturing Services) practices, limited shared infrastructure, unfocussed approach, regulatory failures in phase III and many more reasons are behind the Indian pharmaceutical industry’s failure to produce new molecules. Many companies have separated their R&D divisions for reasons of core research and long-term finance availability as well as accounting jugglery.
“The productivity of the Indian scientist is very low,” says Jai Hiremath, chairman of Hikal Limited. India does not have a scientist credited with a single molecule discovery. Transforming the screening of 10,000 chemicals to one molecule is a complex process as is seen from failures in all stages such as screening, discovery of chemicals, lead development, pre-evaluation, phase I, phase II, phase III and phase IV studies in drug discovery.
Then there is no adequate understanding of complex diseases, that is why developing cures for such illnesses is therefore extremely difficult. For example, there are six blockbuster molecules based on the statin family like lovastatin, simvastatins, pravastatins, atorvastatins, rosuvastatins and fluvastatin molecules. Each of them lowers cholesterol but has side effects. Atorvastatins have been one of the highest selling drugs (called Lipitor) with a market size of $15 billion each year. Different statin molecules have been discovered by various global companies but no Indian company has discovered any molecule in the statin family. The same is the case with hypertension (blood pressure control) drugs. No Indian company has been able to discover any molecule in the sartan family (valsartan, losartan, irbesartan, candesartan, telmisartan, olmesartan) of molecules. Plainly speaking, we have to put together our strategy in a focused manner if we need success in new molecules.
“Continuous improvement is very important, whether it is expanding the use of electronic data capture to reduce errors and improve efficiency, or going global to find the trained investigators and the numbers of patients needed in a timely manner,” says Dr Ferzaan N Engineer, CEO, Quintiles Research (India) Private Ltd. Glenn Saldanha, CEO & MD of Glenmark says, “India has to create a culture for research, else it will be difficult for Indian companies to attain true success in discovery research.”
—Dhruv Rathi [email protected]