Investing: Paras Adenwala

I hold shares of Indian companies that are into drug development. I thought these might help me reap windfall in two-three years. Now, I have given up hope. Should I sell these and buy some momentum stocks or does it make sense to hold them for a year or two?
It is true that drug development in India holds potential. Investors, however, should be aware that drug development/discovery has a long gestation period and therefore requires patience. It involves several steps in research, clinical trials and approvals. The time period from identification of a molecule to final commercialisation could easily take up more than five years. Hence, these investments are ideal for private equity investors. Investors like you would do well to invest in companies that are strong in generics, contract research and manufacturing services or subsidiaries of multinationals. These investments have the potential of giving good returns over the mid to long term.

Should I buy shares of power companies that would benefit from high merchant tariffs? Is it true that these companies are to benefit more this year due to higher demand that wil result in better prices for the power they sell directly to the distributors?
The merchant power business has been attractive in the recent past and holds promise in the short to medium future. However, there is already a beeline of companies setting up power generation capacities. In addition, several companies are beefing up captive power capacities. Therefore, such high merchant tariffs that we witness today may not be sustainable in the medium to long term. The valuations of companies dealing in merchant power have already risen and there is little scope for further re-rating. It would be more advantageous to buy power equipment and power infrastructure companies rather than power generators. These companies would have relatively better and more consistent growth rates.

I have been following banking-exchange traded funds for more than two years. These stocks seem to have delivered returns either on a par with the broader index or even more in some cases. Why does the sector attract such attention? Is there still value in banking stocks?
Banking and financial services are the lifeline of any economy. Hence, these businesses tend to display better growth rates with acceptable levels of consistency. In India, with the economic growth accelerating, the credit off-take, which was relatively muted last year, is expected to pick up. Hence, most banks should report qualitatively superior earnings growth. However, just a caveat here. Those banks that have traditionally relied on treasury income to support earnings growth could witness some pressure on their profitability due to rising interest rates. Investors are advised to identify banks with good managements, strong balance sheets, good distribution networks, high current account and savings account ratios, high net interest margins, low net non-performing assets and of course cheap valuations. Most public sector banks would match several of these criteria and therefore could qualify as good long-term investment bets.

The writer is managing director at Capital Portfolio Advisors. The writer’s views expressed here are his own. Send your queries at yourmoney@bsmail.in