Pharma, IT rally not over yet; there is more meat in midcaps: Analysts

By Sandeep Singh

Domestic equity benchmark Nifty50 has recovered some 92 per cent from last year's lows, when the imposition of a lockdown to curb the spread of the Covid pandemic in the country spooked investors.

The recovery in the markets ever since has been driven by optimism around the development of Covid vaccines and a gush of liquidity that has fueled higher foreign institutional investments, say analysts.


Nifty IT and Pharma indices have rebounded 136 and 99 per cent, respectively, during this period.

In 2020, the S&P BSE Healthcare, S&P BSE IT and S&P BSE Teck indices -- which gauge the performance of healthcare, technology, media and telecom sectors – gained 61.45 per cent, 56.68 per cent and 43.84, respectively, easily beating the 30-scrip Sensex's gain of 6,497 points, or 15.75 per cent.

But is there more steam left in these stocks?

Hemen Kapadia of Mumbai-based KRChoksey Securities remains bullish on healthcare and IT, especially pharma shares. “The pharma space has started a multi-year uptrend, which is not over yet. It’s a bit late in the day to chase pharma stocks. So I would prefer to wait for a decline or do an SIP on stocks or a pharma fund,” he told ETMarkets.com.

His top bets among the drug makers include Sun Pharma (for a target price of Rs 900), Lupin (Rs 1,500) and Glenmark (Rs 700).

"The Pharma index has ended a five-year downtrend and has begun a fresh bull run, which should play out over the next couple of years,” Kapadia said. The Nifty Pharma Index currently trades 108 per cent higher compared with its 52-week low.

“Global spend on IT and pharma is bound to increase strongly due to the changes after the pandemic. The business undercurrent has improved with high conviction for Indian products and a rise in global demand. This will help maintain premium valuations," Vinod Nair, Head of Research at Kochi-based Geojit Financial Services, told ETMarkets.com.

Analysts say investors need to closely watch the dollar movement going forward. The Dollar Index -- which gauges the performance of the greenback against six other currencies -- currently stands at 90.0980, almost 12 per cent below its 52-week peak of 102.9920 hit last year.

The dollar may recover some of the lost ground in the near term, said Kapadia, who is bullish on metal stocks. “The Dollar Index is quite oversold... with support coming in at 88-88.50 levels, which indicates the possibility of a rebound to 92.50-94 level over the next few months."

Strength in the greenback augurs well for exporters like IT and pharma companies, which derive the lion’s share of their revenue from foreign markets.

Nair is positive on both the sectors from a long-term perspective, as he expects these to outperform the broader market even if there is consolidation going forward.

“A sharp rise in the inflation trajectory or spike in bond yield will make the dollar dearer in 2021... But this will be positive for exporters like IT and pharma companies... Other factors to watch will be the new policy or changes made to trade, business, H-1B visas, taxation and political agenda by the new Democrat government in the US," Geojit's Nair told ETMarkets.com.

“Midcaps and smallcaps from these sectors can do better as the broader market is likely to maintain optimism in 2021," he said.

Despite the recent rally, there is more room for investment in both IT and pharma shares, said Ashis Biswas, head of technical research at the Indore-based CapitalVia Global Research, describing both spaces as "the evergreen sectors to invest in the Indian market".

He recommends going long on MindTree for a target price of Rs 2,140 from a medium-term perspective, with a stop loss at Rs 1,540.