Defensive Stocks Underperform: IT, FMCG, Pharma Sectors Lag as Valuations Compress

Traditionally considered recession-proof and stable, the FMCG, IT services, and pharma sectors have failed to provide the expected stability to Indian equity investors over the past 12 months. Instead, they have been major underperformers, with broader market indices and cyclical sectors such as banking, metals, and automotive leading the recovery.

The Nifty IT index has seen a decline of 12.7 per cent, while the Nifty FMCG index dropped 5.7 per cent since October last year. The Nifty Pharma index also remained in the red, down 1.8 per cent.

Key companies like Tata Consultancy Services, Infosys, and Wipro in IT, Hindustan Unilever, ITC, and Asian Paints in FMCG, and Sun Pharmaceutical Industries, Cipla, and Dr Reddy’s Laboratories in pharma have all lagged.

**Valuation Compression:**

On a positive note, the underperformance has led to a sharp reduction in the valuations of these sectors. The trailing Price-to-Earnings (P/E) multiple for IT companies has fallen from 31.2x to 24.7x, and their Price-to-Book (P/B) ratio has eased from 9.5 to 7.3. FMCG companies now trade at a P/E of 47.5x (down from 51x) and a P/B of 11 (down from 12.4). Pharma firms have seen their P/E drop to 32.5x (from 39.8x) and P/B to 5 (from 5.9).

In contrast, the Nifty 50's P/E remains around 22.5x. These lower valuations in defensive sectors now offer potential downside protection and room for a rebound if market sentiment turns positive.

**Company Outlook:**

The article highlights potential turnaround candidates:

* **Tata Technologies:** Showed revenue recovery in Q2, with strong growth in non-auto segments, targeting double-digit growth in FY27. * **KPIT Technologies:** Expects a stronger second half with a solid deal pipeline, though some analysts have revised revenue estimates downwards. * **Infosys:** Narrowed its FY26 revenue guidance to 2-3% after strong H1 performance, maintaining margin guidance. * **Zydus Lifesciences:** Reported strong Q1 performance driven by chronic therapies and US formulations, with strategic acquisitions bolstering its wellness segment. * **Dr Reddy’s Laboratories:** Saw Q2 performance impacted by North America, but India business grew robustly. Future growth hinges on new drug filings. * **Varun Beverages:** Despite a Q3 dent from weak demand, consolidated sales and profit saw growth, aided by overseas performance. Stock trades at a compressed P/E. * **Pidilite Industries:** Reported modest net sales and profit growth in Q2, with operating margins expanding. Valuations have decreased but remain high. * **ITC:** Stock declined due to pressures in paper and packaging, and agribusiness, despite growth in non-tobacco FMCG. Valuations are lower, offering upside potential. * **Marico:** Outperformed its peers with strong volume growth in its core business, though near-term margin pressure from rising copra prices is expected. * **Tata Consultancy Services:** Facing challenges with low single-digit growth, the company plans significant investment in data centers, though near-term revenue impact is uncertain.

**Impact:**

This news directly impacts the Indian stock market by highlighting a significant shift in sector performance. The underperformance of traditionally stable defensive stocks suggests a change in investor sentiment, moving towards more cyclical areas. The compressed valuations in defensive sectors present potential investment opportunities, influencing portfolio allocation decisions for investors. The detailed analysis of individual companies also provides specific insights for stock selection within these sectors.

**Difficult Terms:**

* **Defensive Sectors:** Industries that are expected to perform relatively well during economic downturns or market volatility, such as FMCG, pharmaceuticals, and utilities, as demand for their products is generally inelastic. * **Cyclical Sectors:** Industries whose performance is closely tied to the economic cycle, such as automotive, banking, metals, and real estate. They tend to perform well during economic expansions and poorly during contractions. * **Bourses:** Refers to stock exchanges, like the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) in India. * **Calendar Year (CY):** Refers to the period from January 1 to December 31. * **Price-to-Earnings (P/E) Multiple:** A valuation ratio that compares a company's current share price to its earnings per share (EPS). It indicates how much investors are willing to pay for each dollar of earnings. * **Price-to-Book (P/B) Ratio:** A valuation ratio that compares a company's market capitalization to its book value. It indicates how much investors are willing to pay for each dollar of a company's net assets. * **Basis Points (bps):** A unit of measure used in finance to describe small changes in interest rates or other percentages. 1 basis point equals 0.01%. * **Constant Currency:** A method of reporting financial results that removes the impact of foreign exchange rate fluctuations, allowing for a clearer comparison of underlying business performance across periods. * **Year-on-year (Y-o-Y):** A comparison of financial data from the current period to the same period in the previous year. * **Sequential:** Refers to a comparison of data from one period to the immediately preceding period (e.g., Q2 compared to Q1). * **Abbreviated New Drug Application (ANDA):** A type of application filed with the U.S. Food and Drug Administration (FDA) for a generic drug, demonstrating that it is bioequivalent to a brand-name drug. * **505(b)(2) Pipeline:** A pathway for drug approval in the United States under which a company can rely, in part, on published literature and the FDA's previous findings for approval of a new drug, often leading to a faster approval process. * **Earnings Before Interest, Tax, Depreciation, and Amortisation (EBITDA):** A measure of a company's operating performance, excluding financing and accounting decisions. * **Compound Annual Growth Rate (CAGR):** The average annual growth rate of an investment over a specified period longer than one year.