Assessing Sectoral Divergence in a Volatile Market: Why IT and Pharma Offer Contrasting Opportunities?

In the final quarter of 2025, India's capital markets underscored a stark divergence between the IT and pharmaceutical sectors, offering investors a compelling case study in sector rotation and risk-adjusted returns. As global uncertainties-ranging from U.S. tariff policies to geopolitical tensions-intensified volatility, the IT sector's mixed performance contrasted sharply with the pharmaceutical industry's resilience, albeit with notable exceptions. This divergence highlights strategic opportunities for 2026, where capital allocation must balance innovation-driven growth with defensive positioning.

IT Sector: Innovation Amid Headwinds

The IT sector, a cornerstone of India's economy, delivered uneven results in Q4 FY2025. HCL Tech, for instance, reported a 6% year-on-year revenue increase to ₹30,246 crore, driven by AI-driven new bookings of $3 billion and a disciplined cost structure. Its guidance for FY2026-a 2%-5% revenue growth-reflects cautious optimism amid global macroeconomic headwinds. Meanwhile, Infosys posted 4.7% constant currency revenue growth, with EBIT margins expanding to 18.3%, aided by a reduction in employee expenses from 54% to 52.7% of revenues.

However, these gains were tempered by broader challenges. The sector faced delayed deal realizations due to subdued client spending and regulatory risks, such as U.S. tariff threats. Volatility in IT stocks, as noted in academic analyses, remained pronounced, with daily price swings reflecting investor skepticism about long-term growth sustainability. The sector's Sharpe ratio-a measure of risk-adjusted returns-was further strained by this volatility, even as AI-led modernization became a central theme in large deals.

Pharma Sector: Resilience and Divergent Performance

The pharmaceutical sector, by contrast, demonstrated a more nuanced picture. While the broader healthcare industry attracted capital amid its 14% year-to-date gain in the Health Care Select Sector SPDR Fund (XLV), individual stocks diverged sharply. Ajanta Pharma, for example, reported record quarterly net sales of ₹1,302.65 crore and an operating profit of ₹351.35 crore in June 2025. Its earnings per share (EPS) surged to ₹20.37, signaling robust profitability. Yet, liquidity concerns emerged, with cash reserves hitting a six-period low-a red flag for investors.

At the other end of the spectrum, Mangalam Drugs and Organics Ltd plummeted to a 52-week low in November 2025, shedding 62.61% of its value over three months. The stock's underperformance against the Sensex's 6.37% gain highlighted structural weaknesses, including weak demand and regulatory pressures. Despite these challenges, the pharma sector's risk-adjusted returns, as measured by the VanEck Pharmaceutical ETF, showed a Sharpe ratio of 0.56, outperforming the IT sector's more volatile profile.

Strategic Implications for 2026

The contrasting trajectories of these sectors suggest a clear case for sector rotation. In a down market, pharma's defensive characteristics-such as stable cash flows and inelastic demand-make it an attractive haven. Catalysts like FDA clarity, interest rate cuts, and potential M&A activity could further bolster the sector. For instance, Ajanta Pharma's strong earnings, despite liquidity risks, position it as a candidate for consolidation or strategic partnerships.

Conversely, the IT sector's growth hinges on execution of AI initiatives and navigating macroeconomic headwinds. While HCL Tech's $3 billion in AI bookings and Infosys's margin expansion are positive, investors must weigh these against the sector's elevated volatility. The IT sector's Sharpe ratio, though not explicitly quantified in available data, appears to lag behind pharma's, given its exposure to cyclical demand.

Conclusion

As 2026 unfolds, investors must navigate a landscape where sectoral divergence is not just a trend but a strategic imperative. The IT sector's innovation-driven growth remains compelling but comes with higher risk, while the pharma sector's resilience offers a counterbalance in a volatile market. For those seeking risk-adjusted returns, the pharma sector's defensive traits and potential catalysts may outweigh its liquidity challenges, whereas IT stocks like HCL Tech and Infosys require a longer-term horizon to realize their AI-driven potential.