After opening the day in red, share markets in India witnessed choppy trading activity throughout the day and are presently below the dotted line. All sectoral indices are trading in red with stocks in the pharma sector and stocks in the realty sector leading the losses.
The BSE Sensex is down by 110 points (down 0.3%) and the NSE Nifty is trading down by 50 points (down 0.5%). Meanwhile, the BSE Mid Cap index is trading down by 1.3%, while the BSE Small Cap index is trading down by 1.2%. The rupee is trading at 66.62 to the US$.
In news from stocks in the IT sector. According to a leading financial daily, HCL Technologies is set to replace Wipro Ltd as the definitive number 3 player in the Indian IT space.
HCL Technologies Ltd is set to surpass Wipro Ltd to become India's third biggest software services provider in the three months to 30 June, marking the first change in the pecking order of the country's US$167 billion information technology outsourcing industry in six years.
Reportedly, Billionaire Shiv Nadar-led HCL Technologies expects its dollar revenue to grow by as much as 12.5% in the current financial year, implying that the company will race past Azim Premji-led Wipro.
HCL's rise has come on the back of years of underperformance by Wipro. Until a few years ago, both companies used to generate significant business from managing data centres or offering infrastructure services to their clients. That revenue disappeared with the rise of cloud computing or offerings of computing power by the hour by firms such as Amazon Web Services.
To mitigate this, HCL Technologies has invested over US$1.3 billion over the past two years in licensing intellectual properties from companies and then building products around them for clients. This has proved financially lucrative for the company in the short run.
Note that, HCL has already surpassed Wipro in terms of market capitalization. It could soon do so in terms of revenue as well.
This shake up in the pecking order is the first since 2012. Could this be a sign of changing times in the IT sector.
How It Paid Off to Bet on the Uncertainties in the IT Sector
During the financial year 2017-18, the BSE Sensex delivered a return of about 11%. Blame the market correction that started in February for the modest returns.
However, the BSE IT index gained over 19% during the same period. Now, that's a significant outperformance. If you were holding some solid IT stocks last year, you have most likely fared better than the Sensex.
But last year, the markets were not as optimistic on the sector as they are now.
Look at the chart...
During the first half of 2017-18, the IT sector was among the underperformers, and it was lagging way behind the Sensex.
During the first half of 2017-18, the IT sector was among the underperformers, and it was lagging way behind the Sensex. In fact, until October 2017, the index was still hovering near levels seen in April 2017.
But once the mood of the market changed, the IT index not only recovered, but went on to outperform the Sensex.
In Ankit Shah's (Research Analyst) premium newsletter Insider, the IT sector was his top pick since launch of the service in July 2017.
Here's Ankit discussing what gave him the foresight to recommend so many promising IT stocks.
- Last year when I had discussions with my fundamentals-based research team, I got a clear sense that the uncertainty and negativity surrounding the IT sector -- the H1-B visa problem, the global slowdown concerns, strengthening of the Indian rupee, high attrition rates, etc. -- was blown out of proportion. There was a good contrarian opportunity to buy 'uncertainty' when the markets were fearful of IT stocks.
Like I said earlier, it is during moments of 'uncertainty' that lucrative investment opportunities are created.
At the time of writing, HCL share price was trading down by 6.6%, while Wipro share price was down by 1.5%.
Moving on to news from stocks in the pharma sector. Biocon share price is in focus today after the United States Food & Drug Administration (USFDA) and European regulators inspected the company's sterile drug product manufacturing facility in Bengaluru and issued observations.
Post the inspection, the company has received a Form 483 with 7 observations. Meanwhile a preliminary report from European regulators listed 6 observations, with no observation listed as critical.
As per the USFDA, Form 483 notifies the company's management of objectionable conditions based on observations made by its investigators about the conditions or practices which would 'indicate that any food, drug, device or cosmetic has been adulterated or is being prepared, packed, or held under conditions whereby it may become adulterated or rendered injurious to health.'
In response to one Form 483 observation issued by the USFDA, Biocon said it will respond with a corrective and preventive action plan in a timely manner.
At the time of writing, Biocon share price was trading down by 5.6%.
Is this the right time to buy pharma stocks?
There was a time when almost every stock in the pharma sector was considered to be a safe stock. You could just pick the top 5-6 companies from this sector and expect to make decent returns over time.
In fact, it was termed as defensive sector. However, in last two years things have changed a lot. There is enormous uncertainty in the industry.
Uncertainty regarding price erosion in the United States as well as hostile US FDA visits, have changed a once defensive sector into a risky sector.
However, we believe this could be point of consolidation in the industry i.e. with stricter norms, lower margins, and pricing pressure, the industry may see many exits and acquisitions. This could lead to relatively fewer but higher quality players.
We believe, if you can pick a niche company with good financials and strong management, this is a good time to consider pharma stocks.
For information on how to pick stocks that have the potential to deliver big returns, download our special report now!
This article was originally published in English at www.equitymaster.com
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