Mumbai: India’s Bajaj Allianz Life Insurance is looking to raise its exposure to local IT services companies and drugmakers in 2019, drawn by attractive valuations and easing regulatory issues, even as a strengthening rupee threatens to hurt earnings. Strong free cash flows and growth in the main export market in the U.S. bode well for IT firms, while select pharmaceutical companies will benefit from the resolution of regulatory clampdowns and steady drug approvals, Sampath Reddy, chief investment officer at Bajaj Allianz Life told Reuters.
The Indian rupee has weakened significantly against the dollar this year on the back of an emerging market rout and domestic economic concerns but has pared some of its losses in recent weeks as global oil prices ease off. An appreciating rupee hurts the earnings of exporters who bill most of their clients in dollars.
“In spite of a reversal in rupee, we still think that IT will do well," said Reddy, who manages about 530 billion Indian rupees ($7.59 billion) in both equities and debt. “They are all good, large companies with free cash flows. We like that sector and would probably look to go overweight."
India’s top software services exporter Tata Consultancy Services Ltd (TCS) last month forecast double-digit revenue growth this fiscal year, driven by strong demand for digital services and robust spending by key clients.
The pharmaceuticals sector, however, has been hit hard over the past couple of years due to quality-related sanctions by the U.S. FDA and reduced pricing power due to consolidation among distributors in the United States, their biggest market.
But Reddy said he would look at select pharma companies as FDA issues were being addressed and drug approvals were coming in steadily.
“It would be still product specific and company specific issues and one has to keep evaluating those," he said. “But the pricing pressure in the U.S. is something one has to keep watching for."
Both the Nifty IT and Nifty pharma indexes have dropped about 10 percent in the past two months.
Reddy said he expected a much-awaited recovery in corporate earnings in 2019, estimating a 15-18 percent growth for the next two years.
The recovery, he said, would be led by private-sector banks, as a massive pile of bad loans across the sector that have been a drag on earnings, continue to shrink.
Reddy also said he would look to increase his holdings in capital goods companies that will benefit from an economic revival in the country and higher capital expenditure by companies.
“There seems to be an improvement in terms of margins as well as utilisation levels in most of these companies," he said. “I think that sector should be watched very closely."