The rupee movement does act as a tailwind for IT and pharma, but select companies stand to benefit more over the next two years, said Mayuresh Joshi, Fund Manager, Angel Broking. He told ETNow.

Edited excerpts:
ETNow: What is your view on the markets?

Mayuresh Joshi: With the Turkish currency crisis clearly spilling on to the emerging economies and the rupee also reflecting the same along with added pressures, you are probably seeing how the global trends are panning out. This is specifically in the aftermath of trade tariffs, hard landing of Brexit and central banks — especially the US — expected to hike rates.

The big point is how macro factors — our fiscal and current account deficits — will look like. Our trade deficit hit an all-time high of $18 billion. Add to that the MPC minutes in terms of how the inflation targets are set out.

Against this backdrop, the earnings have been reasonable on a low base. But our own sense is the earnings recovery should be very, very evident in the second half. Private capex might still lag, but the moot point the markets probably look out for is earnings recovery and the traction that should start holding out from the second half. A large element in terms of the market in our sense is we are not seeing a huge rally from the current levels nor are we seeing a huge fall.

Again, the caveat here is that if something goes wrong globally, the fall might accentuate. But at this point, it is more stock specific for us in markets like this where valuations are probably very close to their mean.

ET Now: What is your view on rupee depreciation and how can that help pharma and IT index?

Mayuresh Joshi: The rupee depreciating against the dollar obviously does create a huge amount of tailwinds for both these sectors. However, a few of these companies already have their hedging policies in place. How much impact does that have really depends on the hedging policy. It should have a positive effect.

For pharma in general, what you have probably seen in terms of their pain points is pricing pressure, which is still very, very evident. But they will slowly and steadily start getting off because of the concentrated efforts for large companies with a significant R&D spend in creating a niche specialty pipeline. That should probably help and augur well in terms of the back-ended revenues over the next few quarters. A large element in terms of resolutions will also ensure the pipeline remains strong. So again, selectively on pharma, we remain extremely optimistic.

For IT also, the tailwind probably helps them in terms of translationary effects on to their P&L (profit and loss), but a large element in terms of their digital investments are finally paying off as contribution both for largecap and midcaps at this point of time. And the TCB deal wins in the digital landscape are expected to further its earnings momentum.

So, the client wins along with stability in utilisation and lower attrition levels are a positive sign even for the IT sector. The rupee movement does act as a tailwind, but other factors also selectively will help select IT and pharma companies over the next two years.

ET Now: Which are your picks?

Mayuresh Joshi: In the banking universe, YES Bank, RBL Bank still remain our favourites more in terms of the liability and granularity these banks are achieving. At the same time, asset quality pressures are not being so evident, which is being displayed through lower credit cost and provisioning. That will have a very positive effect because the advances growth is far better than what the industry is posting, creating a natural leverage on their balance sheet and improvement in both ROEs and ROAs even from the current level.

In the midcap universe, Amber Enterprises would probably remain one of my preferred picks at this point though the inventory probably got built up because of the unseasonal summer. The management is very confident that in Q2, the inventory will be disposed of.

Over time, stability in input costs and more and more outsourcing probably happening from original equipment manufacturers along with a large demand should ensure the EBITDA margin should hold up. And our own estimates are a huge growth in terms of top line and bottom line, which should support earnings substantially over the next couple of years. In the midcap universe, Amber Enterprises on declines is something we will continue to prefer.

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