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Pharma scrips: Safe prescription?

A. Srikanth

TRENDS over the last 15 trading days suggest that the market is still lacking direction. Though it seems to be turning a little more defensive compared to earlier periods, it still retains its strong interest for information technology stocks. It is, how ever, more selective and rational in its reaction towards developments in the information technology sector. Valuations are not expected to go up any significantly in the medium term, except for some minor adjustments.

The defensive nature of the market can be witnessed from the increase in interest for stocks in the pharmaceutical sector. Most of the major stocks in this sector have gained significantly over the last two weeks.

What initially started off as a diversification strategy, now appears to reflect the expectations of the market about the future course of the economy.

Defensive stocks are preferred only when the market expects the economy to slow down. Though the index of industrial production figures portends a buoyant medium-term outlook, industry players are still sceptical. Major gainers in the recent past include Cipla, Ranbaxy, Sun Pharmaceuticals, Dr. Reddy's Labs and Novartis.

Except for a few segments, the recovery has not touched most of the other areas. The recent hike in industrial production figures indicates higher capacity utilisation levels.

On the other hand, the capital goods segment continued to post low growth rates compared to the previous year. Consequently investments are still marginal. This has taken away hopes from many in the allied industries. If things do not improve over the ne xt two months, not much can be expected from the rest of the year. This is the consensus view of most in the industry. From the point of view of investments, this does not reflect well on the future prospects of most cyclical value sectors, comprising en gineering and commodities.

Lack of optimism in the cyclical value sectors has not taken away the interest of the market. Recent trends suggest that the cyclical value sectors have posted the biggest value gains. When the economy is on the recovery path, it is the cyclical value se ctor which generates the maximum percentage returns compared to other sectors.

While this is proving to be true to some extent, waning optimism about the future course of the economy appears to have slowed down the entire process. Consequently, the market has turned cautious in investing in just the top firms in the cyclical value sectors.

The number of cyclical value sector stocks among the top gainers list has been declining over the last few weeks. Major gainers in the recent past include Vikas WSP, Cummins India, Essel Packaging, L&T, Gujarat Ambuja Cements, Reliance Industries, Siemen s, Sundram Clayton and Hindustan Inks.

At the same time, the market has literally ignored the stocks from the defensive value sectors comprising the consumer products, food & dairy and personal products industries. Most major stocks, including Hindustan Lever, Cadbury, ITC, Nirmal, Nestle, ha ve remained range-bound.