In the period of downturns investors should make safer bets by investing in defensive stocks. These stocks tend to perform during recession. These stocks remain stable through various phases of business cycle. They however tend to underperform during an expansion phase. However they are able to register profits in their balance sheets as they produce goods and services which are always needed such as food, power, water and energy.
It is easy to estimate share prices of defensive sectors as they tend to grow relatively at a stable rate that can be predicted with some degree of accuracy, based on historical trends. Some of the defensive sectors to watch in 2009 are as follows:
Telecom: Despite of being in news over the year for various controversies, analysts are still bullish on telecom sector for 2009. In the atmosphere of this economic turmoil telecom is adding on consumers at a whirlwind speed. The figures released by the Telecom Authority of India (TRAI) for the month of October show an unprecedented 10.5 million users added. Resisting the current financial turmoil, India continues to witness high demand in its mobile- phone segment at an increasing rate in FY 2009. This is due to rollout of 3G technology and WIMAX networks and implementation of mobile number portability (MNP). In numeric terms India’s mobile phone is expected to upsurge to 136 million units up by 23.9% from 110 million units in 2008. This compares 16.8% growth in 2008. According to isuppli cellular subscribers in nation will show a growth of up to 319.9 million by the end of 2008, up by 36.9% from 233.6 million of 2007. It is also being estimated that India’s total wireless subscriber’s base will grow at compound annual growth rate (CAGR) of 25.1% from period 2007 to 2012 to reach 715 million by end of 2012.
The reason behind increase in India mobile handset market is decreasing costs of calls, the availability of inexpensive handsets, increasing geographical coverage and operators rising portfolio of value added services (VAS).2009 is expected to be the rollercoaster for telecommunication sector mainly driven by 3G and WIMAX coming in the markets.
Stocks to look in this sector: MTNL, Bharti Airtel, reliance communications (which has launched 3G services)
Engineering and capital goods: in short to medium term current global slowdown may impact growth momentum in capital goods sector. However, the order books of many companies in this sector are strong, leading to visibility of earnings in near future. There has been a growing consensus among policymakers that a private-public partnership is required to remove difficulties concerning the development of infrastructure in the country. This will lead to larger participation for private sector companies in large infrastructure projects. The gap between supply and demand for power increasing. So, power equipment companies can look forward to increase in revenue from power generation and distribution, as the government will be forced to augment the supply side. There is a thrust on development of new wells and improvement of output from old wells in the oil and gas space. This will lead to more projects for engineering companies.
Stocks to look in this sector: BHEL, Punj Lyod, JP associates, Suzlon energy
Oil and gas: India ranks 6th in the world with refining capacity of 3.4%. 76% of India’s demand for petroleum met through imported crude. There has been restive change in the governments approach to E&P activities in the country. Just over 60% of potential in oil sector has been explored so far. In order to enhance energy security of the country, the government has increased thrust on exploration leading to substantial investments in this sector. With this refining activity has been growing.
Current status of India’s refining capacity
· 19 refineries’: 17 in public sector, 2 in private sector
· Capacity had grown from 62 MNT in April 1998 to 149 MNT in January 2007
· Refining capacity is expected to reach 235 MMT BY April 2012.
· Surplus refining capacity of 86 MMT projected in 2011-12
· Large export potential.
Thus post -2009 increased production of oil and gas will be seen. The demand growth for oil and gas will outperform supply growth for sometime to come. The demand for natural gas in India is estimated to increase from about 113 million standard cubic meters per day(mscmd) in the financial year 2008 to 396 mscmd by year 2022.demand for petrol , diesel and jet fuel are expected to grow at a compounded annual rate of 1.7% ,2.5% , and 2.2% respectively till 2010. The medium term outlook for refining margins looks positive due to robust growth in demand.
Stocks to look on to: ONGC, reliance industries, reliance petroleum, carin India
FMCG
FMCG market is something no one can overlook. Increased focus on farm sector will boost income of the rural population and provide more growth prospects for the FMCG companies. FMCG sector is also likely to benefit from growing demand in the market. Since the per capita consumption for almost all the products is low in the country, FMCG companies have extensive opportunities for growth. FMCG companies are showing resilience to economic slowdown. The sector had witnessed higher sales growth in the inflation environment. FMCG sector is expected to grow over by 60%. That means it will translate into a annual growth of 10% over a 5 year period. Products like, hair care, household care, male grooming, female hygiene are and chocolates and confectionary segments are likely to be fastest growing segments.
With cooling of commodity prices, FMCG companies have further reason to cheer. Products in categories like coconut oil, skin care would benefit with lowering of commodity prices. As the sector has the domestic focus, the possibility of an impact of global slowdown on these companies is limited.
Stocks to look on to: HUL, P & G, ITC, Colgate Palmolive
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