Pharma, IT, FMCG emerge favourites

With the markets at an alltime high amid global and local uncertainties, investors seem to be gradually allocating more money to classical defensive segments such as pharmaceuticals (pharma), information technology (IT) and fast moving consumer goods stocks.

So far in August, the Nifty FMCG and Nifty IT indices have gained around 5 per cent each compared to 2 per cent rise in the Nifty50 index.

The Nifty Pharma index, on the other hand, moved up nearly 10 per cent during this period to hit its 52week high of 10,142 last week.

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

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 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 shows.

Among individual stocks, Sun Pharma, Divi’s Laboratories and Cipla in the pharma pack; Nestle India, Britannia Industries, Godrej Consumer Products, Dabur India and Glaxo Smithkline Consumer Healthcare in the FMCG or consumer space hit their respective new highs 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 factors, analysts say, lend confidence about a pick-up in rural growth. This, they believe, augurs well for the FMCG and consumption related stocks. 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. They maintain a 'hold' rating on Hindustan Unilever (HUL), Britannia and Godrej Consumer Products.

“Our preference is more for potential turnaround like improving fundamentals going into FY19, that is, ITC, Dabur and Nestle where we have a buy recommendation. We still remain on the sidelines and less convinced with the risk-reward on Marico, Emami, Colgate and United Spirits. Within discretionary space, Asian Paints and Jubilant FoodWorks remain a buy while Titan is a hold on a 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 the rupee is near an alltime 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 a 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,” said Hemang Jani, head of advisory at Sharekhan by BNP Paribas.