Fall in rupee, market turmoil put focus on safer stocks.
The turmoil on the Street and a continued fall of the rupee may affect growth stocks, pushing equity investors back to the relative safety of defensive counters, or forcing them to flee markets, or both.
The rupee depreciation will make exports competitive, helping pharmaceutical, information technology (IT), automobile, and textile exporters, among others.
The market turmoil also favours consumer goods companies such as ITC, Hindustan Unilever, Asian Paints, Colgate Palmolive, and Nestlé, given their debt-free balance sheets and strong pricing power in the market.
In 2013, the market was lifted by exporters such as Tata Consultancy Services (TCS), Infosys, Sun Pharmaceutical, Lupin, and Bajaj Auto, after a deep correction in July to August following a run on the rupee. The Sensex had ended the year with gains of nine per cent due to a rally in defensives.
The BSE IT Index was the biggest gainer during 2013, up 60 per cent; followed by BSE Healthcare, 22.5 per cent; BSE FMCG, 11 per cent; and BSE Auto, 7.3 per cent.
This more than compensated for the decline in BSE Bankex, 9.4 per cent; BSE Power, 14.6 per cent; BSE Capital Goods, 5.6 per cent; BSE Realty, 32 per cent; and BSE Consumer Durables, 24.6 per cent.
"I see a replay of 2013, when export-intensive sectors gained from the sharp correction in the rupee, reporting faster revenue and profit growth in the latter half of the year and the following year. Other manufacturers will gain as the depreciation will cut competition from imports," said Dhananjay Sinha, head of institutional equity at Emkay Global Financial Services.
But, the turmoil acts against India-focused companies and those in non-tradable sectors such as finance, telecommunications, power, infrastructure, and real estate. A weaker currency raises their input costs and hurts their balance sheets if their debt has been raised abroad.
"Quite a few banks have large exposure to commodity producers such as metal makers, which are on the hook due to the global meltdown in commodity prices. We are avoiding them right now," said Pankaj Murarka, head of equity at Axis Mutual Fund.
The big gainers will be companies such as Infosys, TCS, Sun Pharma, and Lupin, which largely export to developed markets. The gains will be minimal for those exporting to emerging markets such as Africa, South America, and Russia.
"The currency volatility favours developed market currencies while emerging market currencies are being hammered. It translates into lower revenues and profits for companies with operations in emerging markets," Sinha added.
"We have always liked IT, pharmaceutical, and fast-moving consumer goods (FMCG) stocks, given their strong fundamentals. The volatility has only strengthened our conviction," said Murarka.
It also helps that many top defensive stocks are reasonably priced. ITC and Infosys are among the cheapest FMCG and IT stocks, respectively, on price-to-earnings (P/E) basis. TCS, Dr Reddy's, and Lupin are slightly more expensive than the Sensex's current P/E of 20.5 (on a trailing 12-month basis), but offer far superior returns on equity and few balance-sheet risks.
"The correction is a chance to add quality stocks as the turmoil will widen the financial performance between the good companies and the not-so-good ones," said Nitin Jain, chief executive, global asset and wealth management, at Edelweiss Capital.
