Investors may again favour FMCG, tech and pharma sectors; likely to be choosy about stocks

MUMBAI: Consumer goods, technology, and pharmaceutical shares, which have been out of favour since mid-February, may be back in the reckoning soon. But, even within these so called defensive sectors, investors are likely to be choosy about the stocks they pick as valuations of many of them are steep in comparison with their earnings prospects.

For instance, in the consumer goods sector, analysts are recommending ITC over Hindustan Unilever (HUL). In technology, TCS is preferred over Infosys and Wipro, while Sun Pharma is considered the best pick in pharmaceutical sector.

“Smart investors have become choosy about quality names,” said Tirthankar Patnaik, director -- India strategist & chief economist at Religare Capital Markets. “Within the defensive space, investors are focusing on TCS over Wipro, and ITC over HUL.” India’s largest cigarette maker ITC is seen as a favourite among investors in consumer goods, while HUL is losing popularity because of slowing volume growth.

“The recent run-up in HUL’s stock price and growing aversion to defensives leave little or no upside potential for its shares,” Amit Sachdeva, analyst at HSBC, said. “Growth expectations in HUL’s valuation are rich, and in the absence of a revival in volume growth and slowdown across categories, multiples remain vulnerable”.

ITC has rallied 9.6 per cent this year (since January 1 till date), outperforming the benchmark index, BSE Sensex, which has gained 7.7 per cent, and the sectoral index, BSE FMCG Index, that has risen 6.1 per cent. Meanwhile, HUL gained only 4.8 per cent, under-performing the benchmark indices, during the same period.

ITC is expected to report accel-eration in earnings growth in 2014-15, led by higher margin in other FMCG business and recovery in cigarette volume growth. The company is planning to launch new products in the food segment over the next 12-18 months, which could be a trigger for the stock price, say analysts.


In the technology sector, TCS continues to be the favourite especially after the company’s fourth-quarter results bettered market expectations. “We would choose TCS over Infosys on company’s strong growth outlook for FY15,” said Pankaj Pandey, head of research at ICICI Securities. TCS reiterated that 2014-15 revenue growth will be stronger than 2013-14, boosting sentiment.

TCS has rallied 3.1 per cent this year so far, outperforming the sectoral index, BSE IT Index,. which has fallen 2 per cent. Infosys fell 8.2 per cent during the same period. The benchmark index, BSE Sensex, has gained 7.7 per cent in the same period.

“The defensives can under-perform in the near-term due to election euphoria, but over the medium to long-term, they may get re-rated,” said Ambareesh Baliga, managing partner — global wealth management at Edelweiss. “Investors have to choose these stocks to build an equity portfolio as one cannot ignore them.”

In pharma, investors are bullish on Sun Pharma, which acquired Ranbaxy last month. Sun Pharma has rallied 8.6 per cent this year so far, out-performing BSE Sensex, and the sectoral index, BSE Healthcare Index, which has risen 4.9 per cent. “Sun Pharma can potentially generate average annual returns of 25-30 per cent over the next 24-30 months depending on its ability to successfully turn around Ranbaxy’s business and effectively accrue synergy benefits,” said a Sharekhan report.