scorecardresearchDitching pandemic winners? Trend reversal seen in IT, pharma sectors after outperformance during COVID

Ditching pandemic winners? Trend reversal seen in IT, pharma sectors after outperformance during COVID

Updated: 23 Apr 2022, 08:23 AM IST
TL;DR.

With market volatility continuing and sectors like IT and pharma declining on a regular basis, it looks like Dalal Street is now booking profit in pandemic winners and moving on to newer trends.

With market volatility continuing and sectors like IT and pharma declining on a regular basis, it looks like Dalal Street is now booking profit in pandemic winners and moving on to newer trends.

With market volatility continuing and sectors like IT and pharma declining on a regular basis, it looks like Dalal Street is now booking profit in pandemic winners and moving on to newer trends.

With market volatility continuing and sectors like IT and pharma declining on a regular basis, it looks like Dalal Street is now booking profit in pandemic winners and moving on to newer trends.

While the pandemic was a major challenge for most sectors, IT and pharma firms continued to do well and perform robustly during the strenuous time.

But currently, these stocks seem to have been underperforming the markets, particularly in 2022 year-to-date. In 2022 YTD, the Nifty IT index has declined around 18 percent while the Nifty Pharma index is down around 6 percent. In comparison, the benchmark Nifty is down only 0.3 percent despite the massive volatility due to the Russia-Ukraine war, consistent foreign outflows, rising inflation, rate hike concerns, etc.

Just in April, the Nifty IT index has been in red in 10 out of 14 sessions on the back of headwinds like weak Q4 earnings, and Russia-Ukraine tensions. However, during the pandemic, the IT index surged over 250 percent from March lows till December 2021. In comparison, the Nifty rose around 130 percent from its March lows.

According to analysts, technology companies in India were able to win some large deals across the globe and bring about increased scalability in their business models despite the pandemic. Margins also expanded and translated into strong valuations leading to the outperformance during the COVID period.

However, currently, IT stocks have been under pressure of late amid concerns over the margin and demand outlook which can be impacted due to the ongoing geopolitical issues. Of late, IT stocks have seen a strong selloff mainly disappointed going by the results declared.

As per brokerage firm Dolat Capital Market, while commentary for most IT companies still remains upbeat with ‘best of the decade growth prospects’, there will be spillover impact of the current geopolitical situation has not been incorporated in the guidance.

Among stocks, all Nifty IT constituents were also in the red for 2022 year-to-date (YTD). Coforge has fallen the most, 30 percent, followed by L&T Infotech and Tech Mahindra, down 29 percent and 27 percent, respectively. Meanwhile, Wipro, L&T Tech, MindTree, HCL Tech, Infosys and Mphasis have shed between 10 and 25 percent each in this period.

However, since COVID lows till December 2021, Coforge has advanced 700 percent, MindTree has surged over 580 percent, L&T Tech has advanced over 450 percent, Wipro jumped around 350 percent, Tech Mahindra added around 290 percent, Infosys has risen 270 percent, HCL Tech has added 255 percent, and TCS was up around 150 percent.

Meanwhile, Nifty Pharma surged 130 percent from March lows till December 2021, however, since then, the index has declined around 6 percent. In 2020 YTD, only 4 constituents from the pharma index gave positive returns. Laurus Labs and Sun Pharma rose 13 percent and 10 percent, respectively while Biocon and Cipla were the other 2 names, up below 5 percent each. Meanwhile, Zydus Lifesciences and Strides Pharma were the top losers in the sector, down over 20 percent in 2020 YTD. Lupin, Torrent Pharma, Glenmark, Natco Pharma, Dr Reddy's, Gland Pharma, Pfizer, Granules India and Abbott India fell between 10-20 percent each in this period.

Aurobindo, Alkem Labs, Ipca Labs, Alembic Pharma and Divis Labs were also in the red for the period.

However, from March lows, all pharma index constituents have turned multibaggers giving over 100 percent returns to their investors.

Pharma stocks were in focus during the COVID-19 pandemic as it increased the demand for coronavirus drugs and vaccines. Also, since the increase in COVID-19 cases and COVID-19 related diagnostic tests were on the cards during that time, the revenue and earnings upside from related drugs, vaccines and diagnostic tests were positive for the sector. The pandemic also fuelled capacity expansion for intermediates/active pharmaceutical ingredients (APIs) for India to emerge as an alternative source of raw materials.

However, similar to the condition of the IT sector, the pharma segment has also been reeling under pressure from the ongoing Russia-Ukraine war as a majority of pharma companies have a strong presence in both countries.

With elevated prices of organic chemicals and solvents due to the Russia-Ukraine conflict, the earnings to the pharma firms are also likey to be muted for the March quarter which will lead to the continuation of the current underperformance.

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COVID Waves vs Stock Market Returns
First Published: 23 Apr 2022, 08:23 AM IST