Pharma, IT, FMCG sectors are back on investor's radar

With the markets at an all-time high amid global and local uncertainties that lie ahead, investors seem to be gradually moving towards classical defensive plays

With the markets at an all-time high amid global and local uncertainties that lie ahead, investors seem to be gradually allocating more money towards classical defensive plays such as pharmaceuticals (pharma), information technology (IT) and fast moving consumer goods stocks.

Thus far in August, the Nifty FMCG and Nifty IT indices have gained around 5 per cent each, as compared to 2 per cent rise in the Nifty 50 index. The Nifty Pharma index, on the other hand, moved up nearly 10 per cent during this period to hit its 52-week high of 10,142 last week.

“Investors who have made money in sectors like banks, automobiles and consumer goods are now turning to defensives. That apart, the fall in the rupee to record low against the US dollar is propping up sentiment in the IT and pharma sectors,” explains G Chokkalingam, founder and managing director at Equinomics Research.

Thus far in calendar year 2018 (CY18), the Nifty IT and Nifty FMCG indices have outperformed the Nifty50 by gaining around 31 per cent and 21 per cent respectively, as compared to 10 per cent rise in the benchmark index. The Nifty Pharma index, too, has moved up nearly 5 per cent during this period, ACE Equity data show.

Among individual stocks, Sun Pharma, Divi’s Laboratories and Cipla in the pharma pack; Nestle India, Britannia Industries, Godrej Consumer Products, Dabur India and GlaxoSmithkline Consumer Healthcare in the FMCG / consumer space hit their respective new highs in the last week.

Besides forecast of a normal monsoon in FY19, the absence of disruptive events (like demonetisation or the goods and services tax), higher minimum support price for kharif crops, price hikes by manufacturers to pass on the rise in raw material costs and the government’s focus on rural India ahead of elections are some of the factors, analysts say, lend confidence about a pick-up in rural growth. This, they believe, augurs well for the FMCG / consumption related stocks. That said, they do caution against the rich valuations of some of these counters.

Given inflationary pressures, analysts at Jefferies, for instance, expect FMCG companies to hike prices going forward. They maintain a 'hold' rating on Hindustan Unilever (HUL), Britannia and Godrej Consumer Products.

“Our preference is more for potential turnaround set of companies on improving fundamentals going into FY19 i.e., ITC, Dabur and Nestle where we have a buy recommendation. We still remain on the side-lines and less convinced with risk-reward on Marico, Emami, Colgate and United Spirits. Within discretionary space, Asian Paints and Jubilant FoodWorks remain a buy rated while Titan is a hold on less compelling risk-reward," write Varun Lohchab and Tanmay Sharma of Jefferies in a recent report.

As regards IT and pharma stocks, analysts remain bullish on the road ahead given that the rupee is near all-time low against the US dollar.

“With IT companies giving a positive commentary on growth and pricing pressures easing in the pharma sector, stocks from these sectors may see further upside. Investors should buy stocks where valuations are not too stretched and growth potential is visible. We prefer Sun Pharma and Cipla from the pharma space from a long-term perspective,” says Hemang Jani, head of advisory at Sharekhan by BNP Paribas.

UPWARD BOUND

• In August, the Nifty FMCG and Nifty IT indices gained around 5% each compared to 2% rise in the Nifty50 index
• The Nifty Pharma index moved up nearly 10% during this period to hit its 52-week high of 10,142 last week
• In calendar year18, the Nifty IT and Nifty FMCG indices outperformed the Nifty50 by gaining around 31% and 21% respectively
• Individual stocks such as Sun Pharma, Cipla, Nestle, Britannia, Godrej Consumer, Dabur and GlaxoSmithkline hit their respective new highs last week