A sharp slide in rupee has prompted mutual fund managers to bet on export-oriented sectors such as information technology and pharmaceuticals.
The rupee has fallen over 15 percent against the dollar so far this year and is currently trading at 73.43 against the dollar. The currency is down 8.3 percent year on year, which means the depreciation is at a five-year high.
Krishna Sanghavi, head-equities, Canara Robeco Mutual Fund believes companies in export-oriented sectors will benefit from the rupee's depreciation. “We are positive on IT and pharma because of improving business outlook and benefits of rupee depreciation," he says.
Echoing Sanghavi’s view, LIC Mutual Fund’s Chief Investment Officer Sarvana Kumar says, “Pharma and IT companies are likely to report better earnings and an improvement in their profit margins.”
LIC Mutual Fund is sitting on a lot of cash in its equity funds as it feels the upcoming five state assembly elections have given rise to some measure of uncertainty in the market. It is now gradually deploying its cash, taking into account stock valuations and growth, Kumar said.
Fund managers said IT companies having a large exposure to the US will benefit the most, while pharma companies will benefit as exports account for more than 50 percent of their revenues.
Going forward, hedging strategies will be a deciding factor for these companies to make profits on a falling rupee.
ICRA expects the domestic IT services sector to register a compounded annual growth rate of 9-12 percent from 2018 to 2021.
According to the rating agency, there were early signs of improvement in demand for the sector.
Also, given that that the trade deficit and the current account deficit or CAD are rising, the rupee's weakness is beneficial.
The trade deficit hit $157 billion in 2017-18, while the CAD rose to 1.9 percent of the gross domestic product or GDP.
India's third and fourth largest information technology firms reported results this week, and both seem to be recovering from client-specific issues that are slowing growth.
While HCL Technologies reported second-quarter results above analyst estimates, helped by growth across verticals. The Noida-based company's rupee revenue was up 7.1 percent at Rs 14,861 crore, while constant currency growth was 3 percent during the quarter.
On the other hand, Wipro’s IT services revenues rose 5 percent to Rs 14,377.3 crore, 2.8 percent after adjusting for a strong dollar.
Source: moneycontrol.com