Stay selective on defensives amid current market volatility: Analysts

Given the uncertainty on how the market trajectory may play out ahead, analysts believe investors can rotate allocation from high beta stocks to defensive plays albeit selectively

Equity markets have remained range-bound so far in the calendar year 2023 (CY23) with volatility extending to a second month due to the Adani-Hindenburg row.

Given the uncertainty on how the market trajectory may play out ahead, analysts believe investors can rotate allocation from high beta stocks to defensive plays. Though this should be done by being selective within the defensive pack, they add.

While the NSE Nifty index is down nearly 2 per cent so far in CY23 amid relentless foreign investor selling, defensive pockets like Nifty FMCG and IT indices have outperformed the frontline index by rising 5 and 6 per cent, respectively, while the pharma index has lost 3 per cent.

Analysts expect the positive momentum in the FMCG pocket to sustain given the Budget push to increase consumer spending, and easing inflation.

The government, on February 1, rejigged tax slabs under the new income tax regime, including tax exemption on income up to Rs 7 lakh. This will lead to higher disposable income for consumers, which will be a shot in the arm for the FMCG sector, believes Sanjay Moorjani, Research Analyst, Samco Securities.

Besides, increased allocation of Rs 20 trillion towards farm credit could also bolster farm income. 

Analysts, however, advise investors to stay selective given the persistent weakness in rural demand in the immediate future.

AK Prabhakar, head of research, IDBI Capital likes ITC, which has delivered firm bottom line performance in the December quarter of the financial year 2022-23 (Q3FY23) despite flat revenues. “We foresee up to 15 per cent upside in ITC from a one-year perspective given its improved profit appetite. We also like Britannia, which is adequately priced at current levels,” he said.  

For the information technology sector, Prabhakar said large-cap IT companies are expected to comfortably manage macro challenges going ahead given the strong resilience displayed by them in the December quarter.

“Despite a lot of negativity before the Q3 earnings, the view has changed after IT companies delivered the results. Valuation-wise, IT stocks have corrected in terms of time and price, and are currently playing catch-up. We are positive on Infosys, TCS, HCL Tech, and Tech Mahindra, while we like KPIT Tech, Persistent Systems, and LTIMindtree from midcaps", said Gaurang Shah, senior vice president, Geojit Financial Services.

At the same time, the cautious commentary from company managements and the extent of the impact of recessionary fears on discretionary spending still remain key risks.

“Most companies are seeing traction in digital transformation, automation, and costs-takeout-led deals. Pipeline commentaries across the board remain healthy, but we believe revenue growth rates will moderate in FY24 after very strong acceleration seen in the last two years due to accelerated digital adoption,” said Karan Uppal, Research Analyst at PhillipCapital, in a note.

Meanwhile, the performance of pharma companies has largely been mixed in the latest quarter. Sun Pharmaceutical and Dr Reddy’s delivered strong numbers aided by firm sales growth in the US and Russia, and specialty products, while Cipla missed the profit estimates. Divi’s Lab posted a more-than-expected fall in profit due to a decline in generic sales and custom synthesis.  

"FMCG and Pharma stocks look reasonable from a valuation perspective but slow recovery in rural regions and an inflationary environment would restrict any major outperformance. The lack of secular earning triggers could restrict outperformance for the pharma space. We advise investors to remain selective in these two pockets and add long positions in a staggered manner. We are positive on ITC, Godrej Consumer, Sun Pharma, and Dr Reddy's," said Sanjeev Hota, Head of Research, Sharekhan by BNP Paribas.