 "Defensives go on offensive")
Defensives have stolen the show from banks and financial sector on Dalal Street. The three defensive sectors - information technology, FMCG (fast-moving consumer goods) and pharmaceuticals - now top India Inc's profit charts and are ahead of the traditional leader - the financial sector.
Now, companies such as TCS (Tata Consultancy Services), Infosys, ITC, Hindustan Unilever, Sun Pharmaceutical, and Asian Paints together account for a third (31 per cent) of corporate India's net profit. These companies are now ahead of banks and financials, whose profit share has declined to 27.6 per cent during the 12-months ended October-December quarter. Defensives' profit share has doubled in the past five years, and is up two and half times in the past 10 years (see chart).
The Street has got the hint and defensive stocks now dominate the benchmark indices. Information technology, FMCG, and pharmaceuticals together now account for 37.8 and 36.1 per cent of the combined market capitalisation and free-float market capitalisation of Nifty 50 index, respectively. They are followed by financials, with 28.1 per cent weightage in the index. (Market capitalisation is the number of shares multiplied by the current price of those shares on the stock market. Free-float market capitalisation is calculated by discounting the promoters' shares.)
The churn is largely due to the misery of public sector banks and lower-than-expected profits of select private sector banks during the October-December quarter. In all, 10 public sector banks reported a loss at the net level during the October-December quarter against only one loss-making public sector bank a year ago. State Bank of India, the country's biggest lender, remains profitable, but its profits were down by two-thirds during the October-December quarter.
Private sector lenders such as HDFC Bank, HDFC, ICICI Bank, Axis Bank, Yes Bank, and Kotak Mahindra Bank are profitable and continue to grow but their good show has not been enough to make up for the losses posted by the public sector banks.
The analysis is based on the trailing 12-month results for 965 companies, whose quarterly results are available for the past 10 years beginning December 2005 quarter. The sample is filtered for companies with market capitalisation of Rs 100 crore or more at the end of trading on February 15 (Monday).
Among individual companies, Reliance Industries was the most profitable (in absolute terms) during the October-December quarter, followed by TCS and Tata Motors. In all, three out of 10 most-profitable companies in the October-December quarter were defensives - TCS, Infosys, and ITC, in that order.
There has been a sharp rise in the profits and revenue share of defensive sectors in the past three years, as others face headwinds due to industrial slowdown in India and global financial instability. "Traditional heavy-weights in manufacturing and industrial sectors have been knocked by industrial slowdown in India, while commodity and energy producers have suffered blows from reduction in commodity prices," says G Chokkalingam, founder and chief executive, Equinomics Research and Advisory.
The domestic slowdown and global volatility had a limited impact on defensives. At worst, their pace of growth has declined, but most of them remain profitable, unlike industrial and commodity companies.
This has put banks in a peculiar position. Corporate India's most-profitable companies don't need loans.
Most of the companies in the defensive sector are debt-free and fund their growth largely through internal accruals. In others words, banks are being forced to lend to financially-inferior members of corporate India.
