Mutual funds turn upbeat on health care sector, divided on IT prospects

Automobile, capital goods among top overweights for domestic funds

Mutual funds (MFs) are betting on a turnaround in the healthcare sector to boost returns but are divided on the prospects of the information technology (IT) sector amid uncertain growth outlook.

At the end of June, all of the top 20 fund houses were overweight on the healthcare sector vis-à-vis the sector’s presence in the BSE 200 index, shows a report by Motilal Oswal Financial Services (MOFS). In the case of the IT sector, only six of the 20 fund houses had overweight positions. Meanwhile, the overall MF allocation in the technology sector has remained at a three-year low level of 9.3 per cent.

"Uncertainties still remain in the IT sector even though the market is a bit relieved by TCS' first quarter results, which shows that the situation may not be as bad as expected. However, concerns remain over current demand slowdown and its impact on margins. There are also uncertainties on the longer-term impact of generative AI technology on the Indian IT services industry," said Ramesh Mantri, Chief Investment Officer–Equities, WhiteOak Capital MF.

On Friday, the Nifty IT index soared nearly 5 per cent, logging the biggest gain in nearly three years on a 'better-than-expected' results by bellwether Tata Consultancy Services (TCS) eased concerns around the sector’s growth outlook.

“We remain cautious on the India IT services sector. We believe FY24 will likely be a year of revenue growth disappointment and the much-anticipated recovery of operating margin would be delayed given weak growth,” brokerage Nomura said in a note.

The fund managers' bullish stance on healthcare is based on early signs of improvement in the US business environment and attractive valuations.

"There are early signs of a turnaround in base business pricing for 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," DSP MF said in a recent report.

Both pharma and technology were among the worst performers in 2022. While the Nifty IT index ended the year 26 per cent lower, the Nifty Pharma index declined over 11 per cent. The returns have improved significantly this calendar year, courtesy the bull run in the market. So far this year, Nifty Pharma and Nifty IT have gained 11 per cent and 8 per cent, respectively.

Apart from pharma, fund houses are favouring the automobile and capital goods sector. Except for Nippon India MF and Tata MF, all other major fund houses have overweight positions in automobile companies vis-à-vis BSE 200, shows the MOFS report. In the case of capital goods, every fund house in the top 20 has over 4.4 per cent (the sector's weight in BSE 200) allocation.

Private banks, NBFCs and the consumer discretionary are the major sectors where most are underweight.

Fund managers are also running an underweight of 160 basis points on private banks, which have the largest weighting in the BSE 200 index at 19 per cent.