Should you pick every IT, pharma stock to play the currency theme now?

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A stronger dollar is always good news for exporters such as IT and pharma companies. The US dollar index — which gauges the greenback against six peers — staying in the early digits for a fortnight and the rupee inching away from its all-time low of 76.96, hit in March 2022, translates into a favourable currency environment for export-focused businesses.

Analysts say the Fed’s hawkish tone in its bid to tame decades-high inflation at a time of geopolitical turmoil is supporting the dollar.

But does it mean investors should go about buying every stock in export-heavy sectors such as IT, pharma and textiles?

In 2022 so far, the Nifty is down 1.4 percent, and the IT and pharma gauges are down 18.3 percent and 5.3 percent respectively.

This is in contrast to last year when the Nifty IT rewarded investors with a return of 59.6 percent as against the benchmark’s 24.1 percent.

Major IT companies are struggling against high attrition rates as well as employee costs and margin pressure, and drug makers grappling with increased competition, price erosion and a stricter regulatory environment.

The country’s two biggest software exporters saw a sequential jump of more than 200 basis points in attrition in the January-March period.

TCS remained largely flat, sequentially, on the margin front.

Company Margin (%)
TCS 24.96
Infosys 21.5
Wipro

16.74

A ray of hope

Tata Consultancy Services’ management said the company finished the financial year 2021-22 on a strong note, with an all-time high order book that provides a strong base for growth ahead. Infosys gave revenue growth guidance of 13-15 percent for the year ending March 2023, exceeding analysts’ estimates.

How to pick export-heavy stocks now

“We need to understand that when the dollar has become stronger, it is negative for emerging markets. It is only good for exporters, so one needs to look at companies with very good exports, that is companies with higher export revenue than others,” AK Prabhakar, Head of Research at IDBI Capital Markets, told CNBCTV18.com.

He believes the Sri Lanka crisis and lockdowns in China are favourable for Indian exporters in general.

Prabhakar has Infosys, TCS, Sun Pharma, Gland Pharma and Zensar Tech among his top picks among exporters. “TCS has a policy of hedging the risk of currency volatility. They know about 90 percent of revenue in advance,” he said.

Equitymaster Senior Research Analyst Richa Agarwal advises investors to be selective in picking stocks from both baskets. “The IT sector is witnessing a lot of competition from startups, which are not focused on profits but operating in an aggressive expansion mode, and hence attracting most of the talent away from conventional IT companies,” she told CNBCTV18.com.

So how should one assess these companies now?

For IT companies, she suggests investors look at:

  • the company’s range of product and service offerings, especially as digitization and new technologies are being adopted fast
  • client retention and addition
  • ability to maintain margins in the past

For pharma companies:

  • prefer companies with strong management and market leadership in niche products
  • look at pricing power
  • look at companies with diversified markets
  • look at companies with a good track record of complying with regulations of the markets they operate in

“Most importantly, one should be mindful of the pharma company valuations and should not compromise on the margin of safety,” Agarwal added.

How shares have performed in the recent past

IT

Stock Return (%)
One month Three months One year
TCS -4.3 -3.9 13.9
Infosys -16.9 -7 15.6
Wipro -15.6 -7.9 3.9
HCL Tech -7.6 -0.1 18.7
Tech Mahindra -17.3 -10.8 28.9
L&T Infotech -19.7 -18.1 25.7
L&T Tech -17.7 -10.7 55.7
Mindtree -16.4 -4.6 69.3
Mphasis -15.8 -6.5 60.6
Coforge -4.7 -10.9 47.7

Pharma

Stock Return (%)
One month Three months One year
Sun Pharma 1 12.2 44.1
Laurus -1.8 16.7 27.3
Gland Pharma -2.5 -3.6 20.8
Alkem -11.2 -4.9 17.7
Divi’s -1.2 14.3 15.2
Abbott 1 6.2 13.9
Torrent Pharma 0.2 5.9 12.6
Cipla -5.6 5.3 8.2
Cadila -1.1 -11.1 -37.3
Aurobindo -9.2 0.8 -35
Lupin -2.2 -17.2 -29.5
Dr Reddy’s -4.4 -2.1 -19
Biocon 7.3 1.2 -6.5

“Pharma companies hedge a limited portion of currency fluctuations… Sun Pharma has very good exports and Gland is a major supplier to the US,” said Prabhakar of IDBI Capital.

He views textile companies as a likely beneficiary of the stronger dollar, but warns that the rupee might appreciate in the next six months to bring back the currency risk for smaller companies that “don’t get into the business of hedging”.

First Published: May 02, 2022, 12:44 PM IST