IT gains as FMCG stocks take hit

The recent plunge in the rupee has taken the fizz out of consumption stocks, which are known to trade at premium valuations.

Some reasons for high valuations, according to analysts, are easy global liquidity, stable currencies, and high earnings growth in local currency terms. However, the recent developments have reversed all these trends, triggering a sharp rerating in shares of fast moving consumer goods (FMCG) firms.

Between April and August, the BSE FMCG index rose 25 per cent, outperforming the 16 per cent returns by the benchmark Sensex. So far in September, the index has lost more than 6 per cent amid a slide in the rupee. Shares of Hindustan Unilever (HUL), the leader of the pack, have eroded 10 per cent from their peak. So have shares of Britannia and Nestle India.

The Indian currency has depreciated 13 per cent against the greenback this year, with the fall intensifying over the last two months. this year — making it one of

“The market perhaps the best-performing sectoral ignored the link between indices this year. The IT index inflation, currency and cost has gained 8 per cent since of equity — assuming a stable August. The Kotak currency. The earnings of Institutional report, however, many consumer staple and warns that for re-rating in IT discretionary stocks have not stocks to sustain, there has to been that impressive in dollar be continuous and steady terms over the past few depreciation in the rupee. years,” said a note by Kotak “The recent steep re-rating Institutional Equities. of IT stocks, on the back of a

While weakness in the sharp decline in the rupee, rupee has weighted down the may hold only if the market FMCG sector, it has been a shot believes in a steady 2-3 per cent in the arm for the information depreciation per annum of the technology (IT) pack. The BSE rupee for a long time, as was IT index, a gauge of technology the stocks, case in has the risen 1990s 40 when per cent 3-5 per cent per annum depreciation in the rupee was the norm and duly factored in analysts’ models,” the note says.

The IT sector, which has the second-highest weightage in the Sensex after the financial sector, has been a key contributor to the 10 per cent gain for the benchmark this year.

India’s largest IT firm TCS has gained 55 per cent this year, while peer Infosys has climbed 43.4 per cent. The rally in mid-cap IT shares has been much sharper, with Tech Mahindra and Mindtree gaining 68.4 per cent and 89.2 per cent this year, respectively.