How sensitive is the Indian equity market right now to the developments in the western Asian region because on the crude front we seem to be fairly well cushioned from everything that is happening? What caused this downtick in the markets after the kind of jump we saw on Monday?
Sunil Subramaniam: I think that crude already had its big move and while it may not be going from $74 levels to $80, but $74 is still $10 more than what it was. For a pretty long period of time, crude has been in the mid-60s. So, a $10 rise in the price on an average does have its impact on GDP, on inflation, fiscal deficit, everything, and including the industries which use crude products. The costs for paints, fertilisers, chemicals, aviation will go up.
A broad swath of Indian companies use crude as an intermediate. So, to that extent, the impact of crude continues to be worrisome from a hedge fund and short-term FII flow perspective. So, they would rather wait and see which way this goes because the point is that if Iran is being pushed into a corner, will it do something like a blockade on the Hormuz Strait? I think that is the biggest risk that is being factored because about a third of the world’s oil comes through this strait. Iran’s own production of oil is absorbed fully by China and it is not impacted by the embargo that the US has put on Iran oil. They are not selling to anybody else except China, so that is not the concern.
The concern is about Iran retaliating by doing a blockade or threatening to bomb the ships, tankers that go through the Hormuz Strait, number one. Number two, if Iran does do some kind of a counterattack, is Israel going to go away from its stated position of hitting the nuclear sites and hit the refineries in a big way, in which case Iran oil supply goes out and then China will have to buy from somebody else.
I am not saying that in crude we are not yet out of the woods in the sense of predicting stability. My medium-term view of crude is that it should come back down to the mid-60s levels. But till this war-related uncertainty remains, if it remains at the $75 level, it has enough impact on downstream companies in India and the Indian overall scenario. So, I would say that that is the single biggest factor which is making FII stay on the sidelines and causing the volatility. Domestic fund managers are fairly clear. They are stepping in to buy wherever they see value emerging because of FII selling.
But clearly, we will have to wait and see what happens. In the Russia-Ukraine war and in the other wars, there was not an impact on Indian crude. This is the first war where that is being clearly seen as a risk factor and that dominates the FII thought process at this point in time.
There has been a big sword hanging on the pharma sector back home as well. What happens to the protected generic sector?
Sunil Subramaniam: My own sense is that Trump cannot act too tough there because ultimately the US health care system needs to provide cheap healthcare to the public and for social security and healthcare the government picks up the tab. I think this is a lot of rhetoric from Trump. But yes, some tariffs will come in. I do not feel it will be as deep as the market is currently reading. In the BTA, whether India can seek an escape clause also has to be seen. He might put a broad range of pharma tariffs, but then if you sign a BTA with India, that might be excluded from the tariffs. So, the whole set of options are out there in the market.
Obviously now it is a very dangerous time to go and step into the pharma sector to either buy or do anything. It is better to wait out these kinds of statements from Mr Trump as well as the BTA signing before making any strong decisions on CDMO versus generics in terms of the pharma.
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