Market may see more pain – Raamdeo Agrawal

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Raamdeo Agrawal, Director and Co-Founder, Motilal Oswal Securities, said the recent sell-off in the markets was unnerving. “The markets are likely to see some more pain.

High crude prices remain a concern, he said. “This will create a lot of structural problems.”

He however remains bullish on the markets. “A lot of cheap stocks are available. So, serious money can be made if one invests for 2-3 years.”

Prashant Vaishampayan of Pharma Analyst, Kotak Securities said it makes sense for shareholders to tender at Rs 737 per share. He added that fundamentals will not change depending on the open offer. According to him, the generics business is not facing problems and may not be reason for a sell-off.

Excerpts from CNBC-TV18’s exclusive interview with Prashant Vaishampayan and Raamdeo Agrawal:

Q: Is it just a short covering pull back or do you think the worse is over for the moment?

Agrawal: This kind of pains lasts much longer and it does not get over in 15-20 days. So, the damage is quite deep and it is going to take some time before the market actually gets back to previous levels. Even if the index does not go down much, the pain will be there. Two-third of the market decline is over but only one-third of the pain is over. So, some more pain is ahead.

Q: What is making you apprehensive about this market setup now?

Agrawal: Oil prices are at USD 135 per barrel and still people are saying that it could be as high as USD 250 per barrel. You cannot be very right in oil prices. If the oil prices are to stay here or move around USD 120 to USD 150 per barrel, it is going to create a lot of structural problems for the local and global economy.

A lot of things will change. So, oil prices are not going to come down. The talk is how higher it can go. So, in that environment, it is looking very challenging.

Q: Would it be fair to say that the fundamentals or the environment for equities has worsened in the last 3-4 months? Are you feeling less bullish about equities for the foreseeable future?

Agrawal: I am more bullish about equities. I don’t know what is going to happen in 6 or 8 months. I am feeling more bullish purely because we can get stocks of our choice at our prices.

In equities, you can make serious money only if you buy it cheap. Four months back, it was almost impossible to buy anything worthwhile at reasonable prices. Today, you can see some values around where you can say that these are the prices in which you can make some serious money into the next 3-4 years.

Nobody knows whether in the next 6 months whether it will be down or flat. So, I am not talking about a 6-8 month scenario but a little longer-term. You need low prices in the stocks and that is what is there right now.

Q: What is your take on the deal? At Rs 737, does it make sense for shareholders to tender?

Vaishampayan: Yes, it does make great sense for shareholders to tender at Rs 737. It is a huge premium to the current market price and the acceptance ratio will be the thing that you will look at. They are going to make an offer for 20% of the company and the remaining 65% is the free float. So, the acceptance ratio is not going to be very high if everybody tenders.

Q: What about valuations for people who want to hold onto the stock beyond the open offer? What do Ranbaxy’s valuations look like? Is it wise to hold on at these valuations or better to tender an exit to the extent possible?

Vaishampayan: There are several conditions that have to be met and we really do not know what would be the exact number of shares. If there is very little response to the open offer, your shareholding remains only at 35%.

The fundamentals of the companies have not really changed; the topline and EBITDA margin analysis has not changed. Would the number of shares change dramatically because the stake has to go to 50.1? That would certainly mean a huge dilution and the per share value will go down.

If on the other hand, they get their 20% tender, there is no need for any further preferential issue which would have actually given Ranbaxy cash to do more acquisitions. So, we will have to take that call once we get to know how that offer is progressing.

Q: What did you make of the Ranbaxy deal? What would you do with the stock now?

Agrawal: I am actually surprised by the total sellout. Getting Sankyo as a partner was one thing, but this is completely a historical thing. A number one pharmaceutical company from India, which was completely homegrown, has sold out 100%.

I personally had some shares, which I have sold in the market. Right now, we have decided to exit at current prices.

Q: Do you take it as a signal that the management does not have great visibility for going forward into the next 2-3 years?

Agrawal: Somewhere the management must be thinking that either the Indian market opportunity is going to shrink significantly. Generics, per se, all over the world could be facing marginal squeeze. These could be the reasons and obviously they are not able to scale up their own R&D into the entities. Malvinder Singh must be seeing some problem. On his own, he may not be able to see how he can take the company forward from here and he is getting a good deal from Daiichi, so he took it.

Q: Is that a fair way to think for shareholders of Ranbaxy, that if the promoter himself is exiting then there is no point for the minority shareholder to hold on?

Vaishampayan: It is difficult to fault that argument in the short-term.

Q: Do you consider that the generics market is topping out?

Vaishampayan: At the previous earnings call, the management was extremely confident of growth and momentum building up. So, I don’t really see how things would have changed so dramatically in such a short time.

If you look at the quarterly numbers of other Indian companies, we are actually seeing a lot of profitability come back. Managements are becoming more and more confident. I don’t really think that generic business in India or in emerging markets and developed markets are facing that kind of a problem in the short-term.


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