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Business News/ Markets / Stock Markets/  IT, pharma indices outperform Nifty 50 in last 6 months; can the trend continue? Here's what experts say
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IT, pharma indices outperform Nifty 50 in last 6 months; can the trend continue? Here's what experts say

Nifty IT and Nifty Pharma indices have outperformed the Nifty 50 in the last six months, gaining 22 per cent and 18 per cent respectively. Nifty 50 has gained about 10 per cent in the same period.

For January so far, Nifty 50 is down about half a per cent while the pharma index has gained 5 per cent and the IT index is up 3 per cent. (Pixabay)Premium
For January so far, Nifty 50 is down about half a per cent while the pharma index has gained 5 per cent and the IT index is up 3 per cent. (Pixabay)

The Nifty IT and Nifty Pharma indices have clocked healthy gains in the last six months, significantly outperforming the equity benchmark Nifty 50.

Data show that the Nifty IT index has gained 22 per cent while the Pharma index has risen 18 per cent in the last six months against a 10 per cent gain in the equity benchmark Nifty 50. If we consider the shorter timeframe, the IT and pharma indices have gained 19 per cent each in the last three months while the Nifty 50 has gained 13 per cent. For January so far, Nifty 50 is down about half a per cent while the pharma index has gained 5 per cent and the IT index is up 3 per cent.

Performance of Nifty IT, Nifty Pharma and Nifty 50 in the last one year.
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Performance of Nifty IT, Nifty Pharma and Nifty 50 in the last one year. (Mint)

Why have the IT, Pharma indices outperformed?

A confluence of factors has played in favour of IT and pharma indices. While the IT index has gained on hopes of economic recovery in the key markets in the West, rate cuts by the US Fed and improving quarterly earnings, pharma stocks have seen traction on new launches and stabilising pricing pressure in the US.

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Deepak Jasani, Head of Retail Research at HDFC Securities underscored that the results and guidance of IT companies have been in line with or better than the low expectations which has given a boost to IT stocks. Also, other sectors represented in the Nifty came under selling pressure, such as banks, which led to the outperformance of IT, Jasani said.

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On the other hand, volume ramp-up, new launches, and stabilising pricing pressure in the US base business have boosted pharma stocks, Jasani pointed out, adding that margins were also expected to be higher amidst normalising cost inflation and stabilising prices. This outperformance expanded once again in January as other sectors came under selling pressure and pharma was expected to continue doing well.

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Vinod Nair, Head of Research at Geojit Financial Services is of the view that opportunities and rationales for growth stocks and sectors are narrowing due to a slowdown in future earnings growth as realisations and operating margins are moderating.

Nair said a global economic slowdown, led by elevated interest rates and above-average inflation, is anticipated to slow India's corporate earnings growth in 2024–25. India has been trading at a premium valuation for a prolonged time, triggering weakness in high-growth stocks and sectors.

Also Read: Cipla share price down more than 2%: should you BUY, Sell or Hold the stock post Q3 earnings?

"Pharma and IT have been underperforming in the last two to three years due to lofty valuations and a slowdown in the US economy. Currently, the environment is expected to improve during the year with a drop in the US Fed rate and price erosion in the US healthcare sector. Indeed, inflows are expected to improve in both sectors," Nair said.

The road ahead

Most analysts are positive about the pharma sector for the medium term, but the IT index may see consolidation.

Alok Agarwal, Head Quant & Portfolio Manager at Alchemy Capital Management is positive about the pharma sector but in the IT sector, he is positive about the ER&D (engineering research and development) space.

"The IT index is dominated by pure IT services companies, which are seeing a slowdown in their revenue growth and valuations are still nearly 70 per cent higher than 10-year averages, making the risk-reward not too attractive. The better-performing segment in the sector is ER&D (engineering research and development) focused companies, but they have lower representation in the index," said Agarwal.

"Nifty Pharma has outperformed on the back of strong performance and a stable pricing environment in the US. Expectations of favourable generic pricing in 2024 are aiding sentiments in the sector. Multiple tailwinds have boosted margins and valuations at 27 times one-year forward PE is at 18 per cent premium to 10-year averages," Agarwal said.

Some technical analysts believe the pharma index may continue to see gains while the IT index may consolidate.

Riyank Arora, a technical analyst at Mehta Equities said going forward, the rally should continue in pharmaceutical stocks as the chart of the Nifty Pharma index remains on the bullish side. The IT index, however, might take a pause and go through some consolidation phase before the next leg of an up-move.

"Technically speaking, any pullback on the Nifty Pharma index towards the 17,000 mark should offer a good buying opportunity on stocks like Sun Pharma, Dr. Reddy's Labs, Cipla, and Divis Lab - which contribute almost 57 per cent towards the sectoral index," said Arora.

"Similarly, for the Nifty IT index, any pullback towards 35,000 should offer a good buying opportunity on stocks like Infosys, TCS, HCL Technologies, and Tech Mahindra - which contribute nearly 71 per cent towards the sectoral index," Arora said.

Read all market-related news here

Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.

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Published: 29 Jan 2024, 01:27 PM IST
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