Time to buy IT and pharma stocks

IT sector's trading multiples hit post-Lehman lows, providing good entry points

Since February 26, the BSE IT index has declined 11.3 per cent and the BSE health care index 5.5 per cent. The decline in individual stocks is higher. Infosys, for instance, has declined 19 per cent, Wipro 16 per cent and HCL Technologies 12 per cent. Pharma heavyweights, too, have seen a sharp fall— Sun Pharma is down 5.3 per cent, Dr Reddy’s 19 per cent and GSK Pharma 18 per cent. Given the sharp fall in heavyweights is due to the re-balancing of foreign institutional investment portfolios, not fundamental reasons, equity strategists believe this could be a good time to enter these stocks.

The rupee’s six per cent rise through the last six months is a headwind for both these export-oriented sectors; both are expected to witness robust growth; the growth in sales might compensate for the decline in earnings. Edelweiss Securities does not expect the IT sector’s trading multiples to decline, as these are currently close to the historic lows of the post-Lehman crisis; currently, demand is on a strong footing. The brokerage expects the robust domestic demand to bolster headline numbers. This is why the recent sell-off in these stocks has made these attractive, in terms of valuation.

Historically, Infosys has been traded at a one-year forward price/earnings multiple of 18, which has steadily declined due to falling growth. According to consensus estimates, the company’s FY15 price/earnings multiple is 15, while it is 18.5 for TCS, 13.7 for Wipro and 13 for HCL Tech. The trading multiples for FY16 look more attractive. Barclays has upgraded TCS, as it expects the company to deliver sequential revenue growth of more than five per cent in the first half of the financial year. In FY15, growth in the pharmaceuticals sector will primarily be driven by exports, says Emkay Global. The brokerage expects domestic business to see 12-14 per cent growth in FY15, compared with seven-nine per cent in FY14. The sharp fall in Dr Reddy’s, Divi's Labs and GSK Pharma provides opportunities. The rupee’s appreciation is sure to hit earnings. Though IT companies are adequately hedged for the next 6-12 months, analysts expect FY15 and FY16 earnings to be impacted 2.5-5 per cent. Edelweiss Securities says stocks have given phenomenal returns on three occasions when the currency has appreciated more than 10 per cent.