Major fund houses iffy on IT; sure about healthcare turnaround

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Will information technology, the sector that helped the Indian economy achieve a breakthrough since the inauguration of the reforms in early 1990s, find favour with the mutual funds that are currently underweight on IT stocks? Though MF pundits are betting on a resuscitation of the healthcare sector, they seem divided on IT can ride out of the gloom in the growth outlook.

A report by leading house Motilal Oswal Financial Services show that in end-June all major 20 fund houses were overweight on the healthcare sector but only six of them had such a position in IT. In fact, the technology sector was languishing with a three-year low allocation of 9.3% of the entire allocation of the MF industry.

The bullish outlook of the fund houses on the healthcare sector is substantially attributable to the early signs of improvement in the reviving business environment in the US that are displaying lower inflation and fewer possibilities of interest rate hikes. Valuations are also attractive in this sector.

“There are early signs of a turnaround in base business pricing of US generics, with the resumption of physical inspections by the US FDA leading to new approvals and growth opportunities. Valuation, however, is at a discount,” read a report by DSP MF.

IT is suffering from a far more clouded outlook, which has somewhat been revived by the April-June results of the country’s biggest firm TCS. On Friday, the Nifty IT index was pulled up by about 5% by the TCS quarterly result that was better than expected. Friday’s gain was the biggest of Nifty IT index in the past three years. The TCS performance, in fact, helped clear some of the apprehension surrounding the sector.

“Uncertainties still remain in the IT sector, though the market is a bit relieved by the Tata Consultancy Services first quarter results, which show that the situation may not be as bad as expected. However, concerns remain about the current demand slowdown and its impact on margins. There are also uncertainties about the longer-term impact of generative AI technology on the Indian IT services industry,” said Ramesh Mantri, chief investment officer, equities, WhiteOak Capital MF.

Brokerage house Noruma said in a note, “We remain cautious about the Indian IT services sector. We believe FY24 would be a year of revenue growth disappointment and the much-anticipated recovery of operating margin would be delayed given weak growth.”

The year we left behind witnessed some of the worst performances by both IT and healthcare. The Nifty Pharma index dipped 11% lower while the Nifty IT index dived 22%. However, the bull run in the market have significantly improved the returns. This year both indices have gained. While Nifty Pharma rose 11%, its IT index gained 8%.

The MF houses are also investing in automobile and capitals goods companies. But for Tata MF and Nippon India MF, all fund houses are overweight on automobile stocks compared to BSE 200, said the Motilal Oswal report.

Most houses are underweight on private banks, nonbanking financial companies and consumer discretionary goods. Though private banks, led by HDFC Bank, have the largest weightage at 19% in the BSE 200, fund managers are maintaining an underweight of 160 basis points on private banks.