IT stocks back in vogue, but still a long way to go for pharma

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Mumbai:Among defensives, IT stocks seem to be back in favour with investors, while the once sought after pharma story of India is not favourable as yet, even as a weak rupee boosts revenue for these export-oriented companies. A lot of pressing issues such as pricing pressures in their biggest market US, along with protectionist measures and regulatory crackdown continue to weigh on the latter.

“IT is the strongest performing sector so far this year. The valuations had turned attractive earlier this year, and that has led to an outperformance relative to market,” said Navneet Munot, chief investment officer, SBI Funds Management Pvt. Ltd.

BSE IT index has risen 19.86% so far this year, making it the top-performing index for the year to date. In contrast, Sensex has added around 2%. BSE Healthcare index, on the other hand has dropped 5.89%.

Indian rupee tumbled to a 14-month low against the US dollar on 25 April. It has fallen 4.32% so far in 2018

“A weak rupee and cyclical upturn in advanced countries have worked in favour of Indian IT stocks. However they have run up a lot. We still like TCS though in the pack,” said Dhananjay Sinha, head of research at Emkay Global Financial Services Ltd.

“Pharma is still not in the favoured list as yet though,” added Sinha

Top software services exporter Tata Consultancy Services Ltd (TCS) posted double-digit revenue growth in the March quarter after a 13-quarter streak of underperformance. The firm also announced a 1:1 bonus issue and recommended a final dividend of Rs29 a share.

The announcement sent the stock to hit record highs, while the market capitalization of the company breached the $100 billion mark.

That said, valuations for IT stocks are a concern. The BSE IT index is trading at 18.48 times one-year forward earnings, compared to 16.36 times five-year average.

Of the top five IT stocks, barring Wipro Ltd, all the stocks have logged strong gains for the year to date, are trading above their five-year historical average.

For pharma, pricing pressures in its biggest market – the US –have been a key deterrent. Rising protectionism and the overhang of regulatory issues have continued to bother the sector, which was once considered a hot favourite investment destination in India.

“I think IT too an extent is back in vogue with investors, some recent encouraging quarterly results and commentary, with currency, and the pack has been an outperformer,” said Radhika Gupta, chief executive officer of Edelweiss Asset Management Lt, echoing Sinha’s views.

“Pharma, I think is still not in favour, While currency movement is favourable, a lot of pressing issues have erupted in the past few years,” added Gupta.

Some feel the recent strong interest in IT stocks has lot to do with the fact that many institutional investors missed out on the rally of stocks such as Reliance Industries Ltd. and the likes.

“A lot of domestic investors missed the bus when a few leading large cap stocks rallied since last year. While currency movement may be favourable for IT stocks, the structural issues are not yet resolved,” said a senior official at a fund house, requesting anonymity.

“It is just that domestic investors don’t want to miss out this time, that large cap IT stocks have run up. Valuations are not cheap at all,” he added.livemint