Avoid investing in Pharma & IT stocks. They are now out of favour: Ravi Dharamshi

Avoid Pharma & IT stocks. They are out of favour. Pharma were beneficiaries of a short term Covid cycle whose demand drivers are now gone. IT stocks are facing slowdown in the USA. valuations are high & will correct

Underweight on Pharma stocks

Ravi Dharamshi of ValueQuest Investment Advisors disclosed that his Fund is underweight Pharma stocks because their growth prospects are subdued. He explained that the sector was a beneficiary of a short term boom cycle caused by Covid. There was a period when most businesses could not fulfill the demand and so they went on an overdrive and stocked up heavily. However, now those demand drivers are gone. Companies are stuck with huge inventory.

Pharma stocks are also facing the headwinds of generic prices being under pressure. The US FDA audits are stringent plus there are inventory losses. It is a business cycle which has gone haywire.

IT sector is facing slowdown

As regards the IT sector, Ravi Dharamshi explained that a lot of demand was driven by the US digital boom. However, as there is a slowdown happening in the USA, with layoffs etc, there will be a slowdown in the spending and this will affect the Indian IT sector.

He stated that the valuations of IT stocks are high and it is possible that the market may not assign such high valuation multiple to profits in the next couple of years.

He also pointed out that while IT may come back as a structural theme a couple of years later, at this point it is not clear whether the structural demand will sustain and hence those areas are now out of favour.

He also explained that the IT sector is not a predictable business as is evident from the fact that it is the only sector that gives quarterly guidance. No other sector gives quarterly guidance. Sometimes IT companies come mid quarter and revise their guidance down.

He emphasized that investors are wary about the fact that one does not know what their next quarter is going to be. "While IT is a great sector and eventually I expect it to do well, there had come a point where the valuation has gone from rock bottom in 2018 to a high of 25-30 times multiple. It is a sector that still struggles to grow beyond 15% and where we have no idea what the next quarter’s growth is going to be and, of course, which is facing margin pressure due to 25-30% attrition. Those are the reasons why we have stayed away from IT," he concluded.