Tariff fears hit pharma, but long-term story remains intact: Krishnan VR

"Within this framework, if we consider sectoral strategies tactically, especially given recent RBI actions in the last monetary policy—cutting CRR by 100 basis points and the repo rate by 50 basis points—these are somewhat positive developments, particularly for companies offering fixed-rate loans. These loans won’t be immediately repriced to a lower rate, while the cost of funding (i.e., liabilities) will fall faster. This can support net interest margins for companies like vehicle financiers," says Krishnan VR, Marcellus.

There are a lot of uncertainties and contingent scenarios on the global front, but at the same time, domestic markets are maturely attempting to navigate them. How, according to you, should investors position themselves in the current macroeconomic context—characterised by surplus liquidity, easing monetary policy, lower commodity prices, and everything else happening in the markets?
Krishnan VR: To begin with, corporate earnings growth in India is likely to become scarcer going forward. If you look at nominal GDP growth, broadly speaking, real GDP is forecasted at around 6–6.5%, while inflation has come down to about 3.5–4%, based on last month’s CPI reading. Even with a few percentage points added here and there, in a best-case scenario, aggregate corporate earnings growth is unlikely to exceed 12–13%.

Furthermore, Indian corporates are significantly less leveraged today compared to five years ago. So, the difference between revenue growth and bottom-line EPS growth should be minimal at the aggregate level. As a result, we believe companies that can deliver earnings growth in this environment will command a premium—which is to be expected.

Investors, therefore, should be more selective. Secondly, they need to be more valuation-aware—both relatively and absolutely—and focus on fundamentals rather than themes.

Within this framework, if we consider sectoral strategies tactically, especially given recent RBI actions in the last monetary policy—cutting CRR by 100 basis points and the repo rate by 50 basis points—these are somewhat positive developments, particularly for companies offering fixed-rate loans. These loans won’t be immediately repriced to a lower rate, while the cost of funding (i.e., liabilities) will fall faster. This can support net interest margins for companies like vehicle financiers.

Also, keep in mind that over the past year, the yield curve has steepened by about 100 basis points compared to its previously flat structure.

Having you on board always contributes to building a robust long-term portfolio. I’d now like to explore your sector-specific approach. You touched upon some important ramifications, but fundamentals, as you said, need to be strong. Considering the recent US FDA mini deal and the sector-specific dent we’re seeing in the market, is this the right time to reallocate or rebalance portfolios from a sectoral perspective? Is it the right time to respond to these short-term knee-jerk reactions we’re seeing across sectors? I’m referring to strategies for a medium-term investor—not necessarily long-term—say, with a two-to-three quarter horizon.
Krishnan VR: Regarding the tariff-related headlines—which we now see almost daily—let’s take the IT sector as an example. It's down around 9% in the first half of this year, compared to the Nifty’s decline of about 8%. This indicates the extent of derating in the sector, possibly driven by fears of a US recession or economic slowdown.

However, if we actually look at US economic data from May or the previous month, it has consistently surprised on the upside. For instance, last week’s payrolls data was stronger compared to the same period last year. So, the bearish outlook on the US economy isn’t supported by hard data as of now.

Given that, the underperformance of IT stocks seems to be more sentiment-driven than fundamentally justified. There could be some scope for clawing back the derating, even though we don’t see any strong fundamental triggers. Most large-cap IT companies are still delivering mid- to high-single-digit revenue growth, so fundamentally, there's no major concern.

On the other hand, sectors like pharma are facing real tariff-related issues. We even saw fresh news from the US yesterday. Still, if one adopts a longer-term view, many Indian pharma companies may present attractive opportunities.

As tariff details continue to emerge—amid more confusion than clarity—you mentioned IT and pharma. But I want to understand how an investor should approach this confusion. Everyone has their own investing style—some focus on quality stocks, others look at low P/E opportunities. You’ve previously noted that low P/E stocks performed well post-COVID. So what strategy would you recommend right now?
Krishnan VR: If we take a long-term view, we recently published a study comparing the performance of cyclical or value stocks—like low P/E stocks—with quality or defensive stocks over a 20-year period. Interestingly, the overall performance of both styles has been broadly similar.

What typically happens is that one style outperforms the other over shorter spans—say 5 to 10 years. For example, from 2002 until the Lehman Crisis, value stocks did exceptionally well. Post-Lehman until COVID, quality stocks took the lead. Then again, post-COVID, cyclical stocks outperformed—driven by factors like strong government capex and the fact that many of these stocks were heavily derated during COVID due to lockdown-related impacts.

As a result, these stocks performed strongly over the last five years, outpacing defensive quality portfolios by a wide margin.

However, looking ahead, with government capex likely to moderate and inflation trending lower, the environment may once again become more favourable for quality and defensive investing—compared to the cyclical names that have already had a strong run.