Rupee fall gives leg up to IT, pharma funds, may help ease margin pressure

Absence of niche product launches in the US was a key reason why Indian pharma firms did not perform well between 2015 and 2018
The depreciation in the rupee has given a leg up to information technology (IT) and pharma funds that have been under the weather for much of last year. The fall in the currency will add to the margins of export-oriented sectors such as IT and pharma, as the realisation in rupee terms will increase, say experts. 

IT and pharma funds have returned 4.4 per cent and 1.77 per cent in the past month, respectively.

“Growth has improved for the IT sector in the past 2-3 quarters and valuations look reasonable. The rupee deprecation will further help ease margin pressure,” said Siddharth Khemka, head (retail research), Motilal Oswal Financial Services.

“We are cautious on the sector and prefer companies with attractive valuations, better growth skew and less exposure to immigration risks,” observed a research note by Nomura.

The brokerage expects earnings compound annual growth rate (CAGR) of about 6.5 per cent for tier-1 IT companies over FY19-21, tier-2 IT firms at 9-10 per cent, and challengers at about 20 per cent. Tier-1 IT valuations are at a 5-10 per cent premium to multinational companies and tier-2 IT players.

The rupee has weakened about 1.5 per cent against the dollar, over the past month, to Rs 71.85. On Tuesday, the currency plummeted 97 paise or 1.35 per cent against the greenback, marking its worst single-day fall since August 5 and the lowest closing level in nearly nine months.  

Despite hopes of a revival last year, pharma funds remained laggards among sectoral funds amid headwinds on the compliance and pricing fronts in the US. These funds have shed 11 per cent during the last year but have gained 1.77 per cent in the last month. Fund houses such as ICICI Prudential, DSP, IDBI and Mirae Asset have launched their pharma and healthcare fund offerings over the past year, expecting a change in fortunes.

With manufacturing capex and R&D investments falling consistently and drug discontinuations gaining proportion, analysts expect a rational pricing environment in the US.

“Opening up of China for Indian players may lead to diversion of manufacturing resources from the US, which could push up generic prices in the US. MNC pharma firms will be losers in China and Indian players may benefit,” said a note by Nirmal Bang, an online share trading company.

Absence of niche product launches in the US was a key reason why Indian pharma firms did not perform well between 2015 and 2018. An ICRA report says growth may remain at 11-13 per cent in FY20 on healthy demand from the domestic market, given the higher spend on healthcare, along with improving access.

“Moderation in pricing pressure in the US, launches and market share gains for existing products, and consolidation benefits will drive growth in FY20. Growth will, however, be constrained due to regulatory interventions such as price control, compulsory genericisation, and the US FDA’s oversight for manufacturing deficiencies,” the report observed.

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