Defensive Stocks In India; Why You Should Include Them In Your Portfolio?

5 Mar 2021by Pradeep U

Defensive Stocks In India; Why You Should Include Them In Your Portfolio?

2020, a year when defensive stocks in India turned aggressive 

During the pandemic, investors took shelter in their all-time favorite stocks – FMCG, Healthcare and IT to protect their portfolios from further damage. In today’s article, we will understand what defensive stocks are, how you should pick them and why they should form part of the portfolio. So let’s dive in.

When thunder roars, we find a safe enclosed shelter to protect ourselves. However, what should we do when thunder roars in the stock market?

Take shelter in defensive stocks to mitigate the losses or prevent a portfolio from bleeding.

Which are the defensive stocks in India?

Let’s make it easier for you.

We all have two sets of people/friends in our lives. One, which is there with us through our growing phase, partying with us, praising us, and enjoying with us. However, when we experience a setback in our growth phase, these people disappear in the air.

The second group of people may not party with us all the time but they are there with us despite the situation we are in. This set of people lend a helping hand during our bad phase.

The same is true in terms of stocks. The group that parties with us when we are growing is Cyclical Stocks and the other set that is there with us throughout are Defensive Stocks.

The stock market consists of two types of stocks, ‘Cyclical’ and ‘Defensive stocks.’ According to Investopedia, a defensive stock is a stock that provides stable earnings and consistent dividends regardless of the situation in the overall stock market. These stocks attract a continuous demand for their products, making them more stable during various phases of a business cycle.

Cyclical stocks often give market-beating returns when the sector is booming and experience a setback when the cycle recedes. On the other hand, defensive stocks are immune to recessions and economic slowdowns, and give market-beating returns during difficult times.

Beta Factor

A defensive stock’s price movement is determined by several factors like the beta of the stock, return on equity, and dividend yield. You would now ask what is beta?

Beta is a measure of the stock-price change compared to the overall stock market change. Defensive stocks usually have a beta of less than 1. A stock with a beta of 1 moves at the same rate as the overall market moves whereas a beta of less than 1 would mean that the stock would move at a slower pace than the market on the upside as well as the downside.

Where Do You Find These Stocks?

Unlike cyclical/aggressive stocks, it’s easier to find non-cyclical/defensive stocks. Here’s the easiest trick.

Do you brush your teeth? Do you eat food every single day? Do you use electricity to power your appliances? Do you take medications when you fall sick?

YES. One cannot survive without doing these things.

So look for these companies and see if they are listed on the exchange. It’s that easy!

As you know, the Indian stock market and the economy are different than that of the USA. A few defensive sectors in the U.S. can’t be considered defensive bets in the Indian context.

For instance, the Real Estate sector is considered a defensive sector in the U.S. The reasons are also obvious. In terms of infrastructure, the U.S. is much more developed than India. Our country still needs a lot of time to reach that level.

In the Indian context, broadly, we can group the defensive bets in three categories – FMCG, Healthcare and Information Technology.

Fast Moving Consumer Goods – (FMCG)

People buy fast-moving consumer goods or consumer staples out of sheer necessity regardless of economic conditions. Food, beverages, hygiene products, and several household items form part of MCG.

These stocks have long been and will always remain investors’ defensive bets. Because one will never stop buying products produced by companies in this sector. During a recession, you would see down-trading i.e. a person buying a shampoo of Rs. 150/- may buy a cheaper alternative to it.

Take a look at some of the listed Indian FMCG giants’ performance during the pandemic and over the last 10 years. (Returns as on Feb 25, 2021).

Companies

Long Term Beta

Daily Beta (one month range)

1 Year Returns

Returns (10yr CAGR)

Hindustan Unilever Ltd.

0.61

0.08

-4%

23%

Britannia Industries Ltd.

0.92

0.26

13%

35%

Nestle India Ltd.

0.74

0.43

-1%

17%

Colgate-Palmolive (India) Ltd

0.51

0.09

19%

14%

Tata Consumer Products Ltd

1.1

0.53

73%

22%

Source: Stock Research and Screener

Pharmaceuticals and Healthcare

Along with FMCG stocks, companies that produce medicines have classically been defensive bets. However, in 2020, because of the coronavirus outbreak, several pharmaceutical companies rallied aggressively. Likes of Divi’s laboratory, Dr. Reddy’s, Cipla Ltd., Sun Pharmaceuticals Industries Ltd., and several other players appreciated their share price over 30% within a year.

India has long been under-spending on healthcare. However, the COVID vaccination program received an allocation of Rs. 350bn to support the drive and take it to the remotest corners of the country. The total healthcare allocation for India has gone up from 1.2% of GDP five years ago to 1.5% of GDP in FY20.

Budget 2021-22 showed an outlay of Rs. 2.23 lakh crore towards health and well-being, a hike of 137% over the Rs. 94,452 crore budgeted expenditure on healthcare in the ongoing fiscal. Because of these developments, we think pharmaceutical companies can play out as aggressive bets in India.

Some pharmaceutical giants through which investors made a fortune for themselves during the pandemic. (Returns as on Feb 25, 2021).

Companies

Long Term Beta

Daily Beta (one month range)

1 Year Returns

Returns 10 Year (CAGR)

Divi’s Laboratories Ltd.

0.81

0.74

62%

28%

Sun Pharmaceuticals Industries Ltd.

0.34

0.39

61%

11%

Cipla Ltd.

0.69

0.19

87%

10%

Dr. Reddy’s Laboratories Ltd.

0.53

0.19

44%

11%

Source: Stock Research and Screener


Information Technology

The IT sector is ever evolving. With the advent of technology, data storing devices are getting tinnier. However, that’s not true in terms of the industry and share prices of IT companies. Share prices of these companies are appreciating every day, touching new highs. With the Service sector being the largest globally, advancement in IT has played an important role in booming of the sector. And it’s attracting investors’ eyes.

India late understood the power of digitization (Information technology). However, today, we have two biggest IT hubs in Asia Pacific – Bengaluru and Gurugram. Information technology stocks combining form 15% of the NSE benchmark Nifty 50 index. These stocks have outperformed the broader market. During Covid-19 lockdown, investors took shelter in IT giants like Tata Consultancy Services (TCS), Infosys, and Wipro to cushion their portfolios.

Like Pharma, the IT sector is also shifting its graph from defensive to relatively aggressive. Take a look at the performance of IT behemoths in India during the Pandemic and over the last 10 years. (Returns as on Feb 25, 2021).

Companies

Long Term Beta

Daily Beta (one month range)

1 Year Returns

Returns (10yr CAGR)

Tata Consultancy Services (TCS)

0.89

0.60

415

18%

Infosys

0.48

0.70

76%

10%

Wipro

0.25

0.60

63%

13%

HCL

0.50

0.72

59%

24%

Tech Mahindra

0.74

0.36

18%

20%

Source: Stock Research and Screener


Food For Thought


With the nature of the products and services produced and offered by companies in this sector, despite your investing strategy, it’s advisable to have defensive stocks in your portfolio. Because a well-diversified portfolio of Cyclical and Defensive stocks can fetch better returns in the long run compared to a portfolio highly concentrated in either non-cyclical or defensive stocks.

You can build your balanced portfolio either by doing your own research or associating with experts like Research & Ranking. We don’t make promises which say “XX% returns ‘Guaranteed’ within short term”. We assure our customer's market-beating returns in the long term (+5 years) because in the race of a Turtle and a Rabbit, the Turtle continues to walk at his pace and wins the race.

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Disclaimer: Please note that the names of stocks in this article are only for illustrative purposes and are not Buy, Sell or Hold recommendations.

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