IT, pharma segments may not provide hedge if rupee weakens

There are concerns over margin and growth, which may weigh on sentiment

Changes in the attitude of the US Federal Reserve (US Fed) have led to changes in the attitude of foreign portfolio investors (FPIs). The US Fed has started tapering its monthly bond-buying programme by 15 per cent a month, and has hinted at a rate hike in the first half of calendar year 2022 (CY22). The dollar has hardened, and tighter money supply has made FPIs cautious. 

The FPIs have sold Rs 19,500 crore worth of Indian equity since October 1, and they are net sellers to the tune of Rs 10,965 crore in FY22 (until November 30). The rupee has fallen a little (less than 1 per cent) in the last two months.

Several FPIs have issued advisories stating that India is very highly-valued and they will cut exposure. Historically, FPIs have cut back on December exposure simply because of the Christmas break and financial year end for some FPIs.

Some analysts say the Reserve Bank of India (RBI) will be looking at a rate hike in February, unless inflation moderates. The next fortnight could see critical reviews of these attitudes because of the RBI’s monetary policy review. If the US Fed accelerates the taper at its next review on December 14-15, or issues a hawkish statement, there could be more selling.

If the rupee weakens, the classic hedges would be the IT and pharma sectors. Interestingly, FPIs sold Rs 5,300 crore across the IT sector during October 16-31 (latest available data). However, they were small net buyers in pharma.

The IT sector outperformed the overall market in November, with the Nifty losing 5.3 per cent while the IT index lost 0.7 per cent. Pharma also outperformed the Nifty, losing 2.75 per cent in November. 

Is the IT sector likely to outperform through the second half (H2) of FY22? What about pharma?

In the guidance issued by IT companies in Q2, most majors hoped for a rise of 15-20 per cent in revenues across H2. But they all complained about margin pressures.

There is a strong trend of hiring across the IT sector. In FY21, the sector added 138,000 new jobs although revenues grew only 2 per cent in USD terms. The IT sector has net 122,000 hires in H1 and H2 is expected to see between 150,000-175,000 net hires. If there is a slowdown, especially in North America, top line guidance may be downgraded. But if the rupee falls, revenues could rise in rupee terms.

Pharma, too, is in an equally confusing situation. The industry was driven by the pandemic in FY21. But struggled to manage supply chains because Wuhan is a global centre for active pharmaceutical ingredients.

The supply chains appear to have stabilised. But industry and company guidance are not very optimistic. There are cost-challenges; APIs have become more expensive with the power crisis in China. Growth is likely to slow, and export growth could fall to low single-digits.

There will be volatility across these two sectors in the next fortnight. In pharma, Cipla and Torrent Pharma look technically most bullish, while in IT, L&T Tech and CoForge (formerly NIIT) are the strongest technically.