Pharma & I. T Stocks are the unintended casualty of the great NAMO rally that the markets are currently witnessing. On a YTD basis, the S&P BSE TECk & the CNX Pharma Index are down 7% & 3% respectively while the Nifty is up 15.22%. Today was a particularly nasty day for these stocks with deep cuts across the board. There are two reasons for this gross under-performance.
The first is that the billions of dollars being pumped into the Country by the FIIs means that the rupee has become stronger. Today, for instance, the rupee touched its 11 month high of Rs. 58.37 per dollar as against Rs. 60 a few days ago.
Exporters, like Pharma & I. T. companies, who receive payments in dollars are the worst affected because it means that they will get lesser rupees for their dollars.
Panic-stricken investors are dumping Pharma & InfoTech stocks.
The second reason is that investors have taken a fancy for beaten down sectors like Infra & PSU Banks. Today, for instance, stocks like BHEL, Coal India, SBI etc recorded handsome gains. Infra stocks like GVK Power, Jaypee Infra, I-Bulls Power, REC, NCC, PFC, JP Power, Sintex, HCC etc surged from 14% to 20%. In fact, Gautam Trivedi of Religare pointed out that because mutual funds were fully invested and had no incremental inflows, they were selling Pharma & I. T. stocks and buying infra stocks to “play the beta game and catch up with the market and remain in line with the market in terms of performance“.
The result of this dual blow was that Pharma & I. T stocks were torn apart. Nobody was spared. From Blue-chip behemoths like TCS, Infy, Sun Pharma to minnows like MindTree, Alembic, Shilpa, JB Chem, the cuts were deep, from 5% to 10%.
Now, the question is what do we do.
For this, we have to consider what the trajectory of the rupee is likely to be in the foreseeable future?
Daljeet Kohli, in his “strategy note” has summed up his opinion in pithy words:
“Where will the Rupee be viz-a-viz dollar?
We expect Rupee to trade in range External situation is much better now as compared to what was in Sept 2013. The CAD situation too is much better on back of strict curbs on gold imports etc. Fiscal deficit was also contained well within budgeted target for FY14 (although most of it was done through cutting expenditure). Going forward we expect strict controls on gold may be eased gradually since the demand for gold persists (though official imports have gone down drastically). The negative impact of increase in gold imports may be offset partly by increasing exports of iron ore & other minerals (post the lifting of ban by courts). There is a fear that due to deluge of inflow of dollars rupee may appreciate significantly. However, we do not subscribe to that opinion as there are strong reasons to enhance reserves especially in view of increase in external debt, volatile global risk environment & to offset impact of FCNR deposit scheme (which garnered ~$31bn). We expect rupee to remain in range bound albeit with near term bias towards appreciation.”
Daljeet’s opinion can be supported by the fact that the RBI has given a clear indication that it will not allow the rupee to appreciate below Rs. 58. It will either aggressively buy dollars to shore up the Country’s reserves and/ or relax the norms for repatriation of funds. Finance Secretary Arvind Mayaram also came out and assured that the currency would not be volatile but would be range-bound.
The second aspect is the medium/ long-term outlook of Pharma & InfoTech stocks.
Bharat Shah’s inspiring advice comes to mind. He advised investors to buy top-quality Pharma & I. T. stocks on the rationale that valuations are reasonable, they are fantastic, high quality businesses, they generate outstanding return on capital employed and are superb free-cash generating machines. He emphasized that stocks in both sectors have a long-term good double digit earnings growth ahead of themselves for a multiple year period.
We must also remember Rakesh Jhunjhunwala’s recent categorical statement that “I am bullish on pharma and software for medium term”. Rakesh is obviously seeing some deep discount bargains in these stocks.
The other thing to remember is that the euphoria in PSU Banks & Infra stocks is not supported by fundamentals or an earnings growth. It is based on hope. The order books still look weak and the NPAs are still high. So, if the euphoria evaporates, or there is a hint of drought/ inadequate rainfall, or if the interest rates in the US are raised, etc, etc, and there is a reverse flow of funds, the focus will shift back to exporters like Pharma & Info Tech.
Conventional logic also suggests that buying fundamentally sound stocks that are not in fancy does pay rich dividends when the tide turns.
So, personally, I took advantage of today’s savage sell-off to systematically tuck into my favourite stocks Sun Pharma, Ajanta Pharma, Shilpa Medicare, JB Chem, MindTree etc. I have a lot of dry gunpowder left and I intend to deploy it into these stocks slowly and steadily over the next couple of weeks.