Defensives outperform for the third consecutive year

Last Updated: Thu, Mar 28, 2013 20:40 hrs

Investors continued to take refuge in defensive sector bets in financial year 2012–13 (FY13) for a third year in a row, as most stocks from this space outperformed the markets. On the other hand, the Reserve Bank of India’s (RBI) stance on policy rates for most of FY13, concerns regarding the key macros and pick-up in the investment cycle kept investors away from the rate-sensitive metals, power, infrastructure and capital goods stocks, which under-performed and dipped a little over 10 per cent for the third such year.

The fast-moving consumer goods (FMCG) and pharmaceutical segments, considered a defensive bet in volatile times, have outperformed the market by giving an average of more than 10 per cent in the past three financial years.

The Bombay Stock Exchange (BSE) FMCG index surged 32 per cent and the pharmaceutical index 21 per cent during FY13, as compared to an 8.2 per cent gain recorded by the benchmark Sensex. These indices had witnessed a positive return of between 10-25 per cent against the 11 per cent fall in the Sensex in FY12. Banking and consumer durables sectors also did well, gaining a little over 10 per cent in FY13. (PERFORMANCE METER)

Gains were also visible in the information technology (IT) space, after Infosys surprised the Street with better-than-expected performance in the December quarter. Analysts at Motilal Oswal believe the third quarter might only have been the first one of a visible momentum in the company’s growth and there would be a further upside in the stock from current levels. The brokerage has a target price of Rs 3,260 for Infosys.

“We retain our positive stance on large-cap IT, though we agree the near-term return potential is limited, after the 20 per cent upmove in CNXIT over the past two months,” noted ICICI Securities, in a report dated March 14. The research house maintains a Buy’ rating on Infosys and an Add’ rating on TCS, Wipro and HCL Technologies.

Among individual stocks, Wockhardt, Glenmark Pharmaceuticals, IPCA Laboratories, Sun Pharmaceutical Industries and Strides Arcolab from healthcare and ITC, Godrej Consumer Products, Asian Paints and GSK Consumer Products from the FMCG pack have gained about 35 per cent each.

“The first part of the last financial year was largely governed by the inactions from the government side, particularly from the finance ministry. In fact, they did the maximum damage with their inaction. This was coupled with a lot of negative news flow regarding various scams. Come the second half, the change in the finance ministry saw a lot of policy-related initiatives. This boosted investor confidence, especially (of) the FIIs (foreign institutional investors),” said Deven Choksey, managing director, KR Choksey Securities.

Metal, power and capital goods indices slipped a little more than 10 per cent each during the year. Tata Steel, Hindustan Copper, Steel Authority of India and Jindal Steel & Power from the metals pack and Reliance Power, Adani Power and Jaiprakash Power Ventures from the power sector skidded about 30 per cent each.

Most of the infrastructure companies have high debt and low return on equity (RoE). The government has failed to push infrastructure growth aggressively, with most departments at loggerheads, analysts say, and the fall in their stock prices reflects these concerns. GMR Infrastructure, IRB Infrastructure, Reliance Infrastructure and Lanco Infrastructure have seen market price erosion of a little more than 30 per cent each.

“The dismal performance of the markets post the Budget in February is largely attributed to the over-estimated fiscal deficit numbers the finance minister has factored into his Budget. The biggest damage has been done by the offer for sale (OFS) of stake in various government-controlled public sector companies, which destroyed the entire pricing and value mechanism of the listed stocks,” added Choksey.

PSU basket
Minerals and Metals Trading Corporation, BEML, Hindustan Copper, State Trading Corporation, Engineers India, National Aluminium and National Fertilisers and Rastriya Chemicals and Fertilizers are among public sector undertaking (PSU) stocks which declined by 35-80 per cent.

Investors in about a third of the companies in this segment lost around Rs 700,000 crore of market wealth, though the benchmark indices recorded a gain during FY13. As many as 2,240 stocks from the 3,319 actively traded stocks on the BSE saw a market capitalisation (m-cap) erosion of Rs 659,226 crore in the past year, to Rs 3,188,015 crore on March 28.

The negative news flow, lower-than-expected profit growth and margin pressure forcing the lenders of some companies to offload pledged shares after the promoters failed to repay loans, were among the reasons for these stocks to report negative returns.

Despite the overall macros and the general elections scheduled for 2014, analysts maintain a positive outlook for the equity markets, though with a hint of caution. “We expect the Sensex to touch 23,000 levels by the calendar year-end and expect the RBI to slash rates by 50 basis points (bps) in the next three months. The tax breaks given by the finance minister in the recent Union Budget, along with the capex replacement cycle, should be able to boost the economy. By March 2014, the economy should be growing at 6.5 to seven per cent. The pace of FII flows will continue, given all this,” said Saurabh Mukherjea, head of institutional equities at Ambit Capital.

Given the outperformance and the rich valuations, analysts have turned cautious on the FMCG space. Currently, the BSE Sensex is trading at 16.91 times. The BSE FMCG Index is traded at a price-earning (PE) ratio of 36 times and the healthcare index is quoted at a PE ratio of 34 times, more than twice that of the Sensex.

“FMCG stocks might not perform as well, going ahead, as they did last year, as most stocks are quoting at steep valuations, compared to the estimated growth. Pharma, however, could do well selectively, especially stocks like Cipla, Sun Pharma and Glenmark Pharma,” said Choksey. Analysts expect some amount of stagnation in the prices of banking counters, with ICICI Bank and Axis Bank being the preferred investment options. “One can also consider State Bank of India, Bank of Baroda and Punjab National Bank, which could do well in the second half of the fiscal,” said Choksey.

On the other hand, policy action in the oil and gas space has rekindled investor interest. Upstream companies ONGC, Reliance Industries and Cairn India should do well, analysts say. Among the oil marketing companies, Indian Oil is the best bet. “We are underweight on FMCG, pharmaceuticals and IT sectors. We are also heavily underweight on banks. On the other hand, we are overweight on capital goods, oil & gas and automobiles,” says Mukherjea of Ambit Capital.

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