IT sector could take over the tag of defensives from FMCG stocks. Are you for real?

Investing in a developing country like India where foreign investors hunt for those stocks which could deliver stellar returns is not a new normal. The developing countries are equipped with those industries whose growth rate could not be restricted due to untapped potential which makes developing countries a sweet spot to bank upon. Developing countries invest heavily on infrastructure, telecom, heavy industries, IT sector and financial institutions and institutional investors leave no opportunity of channelizing funds into high growth stocks. Despite, the above-mentioned sectors have made a fortune for investors but investor’s love for FMCGs is never seen faded.

No matter what kind of investor you are, which salary class you belong, which type of portfolio you want to build, inculcation of an FMCG stock into your portfolio is observed highly. Not only the rising markets are an opportunity where investors add an FMCG stock to make some quick bucks but FMCG stocks also act as defensives when markets flow through turbulent times. The major element which has influenced investors to ‘gung ho’ over FMCG stocks is their quick cash conversion cycle which has made them cash-rich companies and high dividend-yield stocks. Major FMCG stocks enjoy debt-free status or low debt-equity ratio which restricts their cost of equity due to low risk and interest obligations. There are sufficient entry barriers for new entrants as old FMCG players have spent considerable funds on promotional activities for brand recognition and development of product line.

It is inevitable to avoid an FMCG stock while designing an optimal portfolio as they serve a defensive role when systematic risk get trigger and standard deviation spike. The FMCG sector is always given higher valuations despite lower growth rate, however, the rising competition from the unlisted space such as Baba Ramdev’s Patanjali and rising trends of unorganized and regional products is fading the charm and IT sector is taking up the charge from here.

Here are the reasons which support IT sector to act as a defensive further:

  1. Shorter distribution channel: FMCG companies are required to go through long distribution channels which keep on reducing their margins and delay their receivables. While, IT industry follows a very small distribution channel which contains not more than three parties and quick conversion of receivables due to involvement of efficient payment gateways makes them highly cash-rich.
  2. Higher Growth Rate: According to NASSCOM, Indian IT industry is expected to grow at 12-14% in upcoming years and relationship of India with tech mammoth U.S. is expected to deliver more revenues in technology pockets. The strong growth rate will rich the valuations of the IT companies and investors will find IT companies a healthy bet in turbulent times too.
  3. Adhesive in operations of every industry: No industry could operate without the involvement of technology companies in their direct and indirect operations. Right the procurement of inputs, accounts maintenance, data management, human resource development and distribution of products to direct customers, technology has been a major adhesive for companies.

It is worth-mentioning that FMCG sector has acted as a hedge in a portfolio and attainment of optimal asset allocation to an ideal portfolio. The FMCG stocks seen better performed than precious metals and treasury bonds which facilitate you to hide when equities tumble. FMCGs are still high dividend paying stocks, debt-free, constantly growing and free from business cycles however the outperforming features of IT industry such as higher growth rate, adhesive requirement and shorter distribution cycle are making them new defensives for upcoming years.

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One Reply to “IT sector could take over the tag of defensives from FMCG stocks. Are you for real?”

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