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Pharma firms will benefit as exports account for over 50% of their revenues.
Pharma firms will benefit as exports account for over 50% of their revenues.

IT, pharma surge despite market turbulence

In the BSE 500 Index, 77 stocks hit their 52-week highs since 28 August

Mumbai: Technology and pharmaceutical stocks bucked the trend on Thursday as equity markets were in a turmoil weighed down by domestic macro concerns and global factors.

Out of the BSE 500 index, 77 stocks hit their 52-week highs since 28 August, while the Sensex plunged nearly 10%. On 28 August, the 30-share Sensex had hit a record high at 38,896.63. Subsequently, it succumbed to selling pressure. Out of the 77, the majority were information technology (IT) and pharma companies, which benefitted from a weak rupee, given that they earn a large part of their revenues in dollars. The rupee has lost 4.81% since 28 August, and 13.34% year-to-date.

Share prices of Tech Mahindra Ltd, Infosys Ltd, Tata Consultancy Services Ltd, HCL Technologies Ltd, Wipro Ltd and Mindtree Ltd touched 52-week highs during the period, gaining between 4% and 55% in this year so far. Pharma stocks such as Dr Reddy’s Laboratories Ltd, Biocon Ltd, Cipla Ltd, Abbott India Ltd, Glenmark Pharmaceuticals Ltd, Torrent Pharmaceuticals Ltd and Aurobindo Pharma Ltd were the star performers, hitting 52-week highs.

Analysts say IT companies having a large exposure to the US will benefit the most, while pharma companies will benefit as exports account for more than 50% of their revenues. However, hedging strategies will be a deciding factor for these companies to make profits on a falling rupee.

Icra Ltd expects the Indian IT services sector to register a compounded annual growth rate of 9-12% in 2018-21. The rating agency said there were early signs of improvement in demand for the sector. “A 1% rupee depreciation vis-a-vis the greenback is likely to have a 0.4%-0.5% impact on a company’s overall operating margins without taking into account foreign exchange hedges," said Gaurav Jain, vice-president, corporate sector ratings, Icra.

Analysts expect favourable currency to boost earnings of IT firms in the September quarter. “Rupee depreciation and improved performance are likely to act as margin tailwinds, driving stronger Ebitda growth. Also, with lower hedge gains being more than offset by sharp translation gains, profit growth will come in even better. Bottoming cyclical pressures will feed into valuation multiples favourably, while supportive currency movements will underpin earnings growth," Icra said.

The BSE IT and BSE Healthcare indices had underperformed benchmarks last year. In 2017, BSE IT was up 10.8% and BSE Healthcare was up 0.48%, against the Sensex’s 27.9%. In the year so far, BSE IT index gained 34.22% and BSE Healthcare lost 1.69%, respectively, while the BSE Sensex rose 3.27%.

According to analysts at Antique Stock Broking Ltd, expectations of earnings troughing out, a more favourable pricing environment in the US and improving secondary market growth in India, backed by strong first quarter results, have given way to optimism for the pharma sector.

However, the brokerage firm sees little scope of sustained outperformance. It said that “earnings downgrades are not yet behind us", adding that the competition is likely to be intense, while higher input cost is yet to be reflected in the profit and loss sheet. “Barring currency tailwinds, the scope for earnings upgrade is very low, in our view," it said in a note on 17 September.

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