IT, Pharma stocks back in demand; could outperform power & banking stocks over the next few months

MUMBAI: Shares of technology and pharmaceutical companies — laggards so far in 2014 — rose in a subdued market on Tuesday as investors and traders judged these stocks were cheap after the recent underperformance. Fund managers and analysts said these stocks, over the next few months, could perform better than this year’s winners such as power, banks, infrastructure and real estate if the rupee weakens amid a likely slowdown in foreign institutional inflows.

Among IT stocks, Infosys surged 3.2%, Tech Mahindra and Wipro rose about 2.7% each and TCS gained close to 2%. BSE’s information technology index advanced 2.3%. The benchmark Sensex ended almost flat after recouping its losses earlier in the day. Healthcare stocks such as Aurobindo Pharma, Wockhardt and Cipla gained 2-6%. Ranbaxy, Sun Pharma and DRL rose 1-2% each. “These stocks have the potential because fundamentally there is nothing wrong with these sectors unlike cyclicals, which have rallied more on hopes,” said V Balasubramanian, senior fund manager, IDBI Asset Management.

Since January, ET’s Infotech index has fallen 3%, while ET’s pharma index has gained close to 7% mainly due to the strength in the rupee against the dollar. “Post this underperformance, valuations for tier-1 IT are in line with historical averages and at par with the market, which we believe is attractive,”said Nomura’s analysts Ashwin Mehta and Pinku Pappan in their latest client note.

The brokerage said it is overweight on the technology services sector citing continuation of strong growth momentum in infrastructure management services (IMS), business process outsourcing (BPO) and Europe, possibility of improved US demand and attractive valuations. HCL Technologies, TCS and Tech Mahindra are Nomura’s top buy recommendations.

Analysts said investors and traders remain optimistic about select stocks in the healthcare sector, which performed in line with analyst expectations in January-March. “We expect domestic formulations to continue to recover and US generics growth to remain strong in FY15,” said Anand Rathi Financial Services’ analysts Sriram Rathi and Shikha Jain in a client note. The brokerage, which is overweight on the sector, counts Lupin, Sun Pharma, Torrent Pharma, Indoco, and Natco as its top picks.