The massive polarisation in Indian equities

Business

oi-Sunil

By Sunil

Published: Thursday, September 13, 2012, 8:44 [IST]

As is the case with Indian society, where the disparities between the "have" and the "have nots" keep getting wider, so it is the case with the Indian stock markets, where valuation gaps between defensive stocks and high beta names keeps getting wider.

The bluest of blue chips stocks are languishing for the last few years, while the defensive stocks are hitting new highs, creating a sharp polarisation between defensives and high beta stocks, like metals real estate and banks.

Defensive stocks are largely the stocks that do not fall in a falling market and rise lesser in a rising market. Typically, defensives stocks are stocks that are not hit by recession including those in pharma and fast moving consumer goods space.

Housing Finance Company, HDFC, which is largely a defensive stock hit a new 52-week high this week, while another defensive from the pharma sector Sun Pharma followed. Last week Hindustan Unilever (HUL), an FMCG defensive stock hit a new 52-week high. The stock has jumped 50% since last September 2011.Other FMCG companies like Marico and Dabur have moved in tandem with HUL.

HUL's price to earnings multiple has defied logic and the price to book value is an astronomical 33 times. Still, investors keep chasing the stock even at higher prices, even though valuations of the company are irrational.

Now look at some of the shares that are not defensives typically the banking and commodity stocks. Shares of State Bank of India and metal names like Hindalco, Tata Steel along with the bluest of blue chips PSU banks are trading very near their 52-week lows.

Shares of Reliance Industries too is trade way below its 52-week high as funds keep chasing the defensive stocks.

Clearly, there seems to be a huge gap building up between the defensive and non-defensive stocks. True, that the economy is passing through a bad phase and stocks like banks that are directly linked to the economy can get affected. However, the justification for such huge disparity in price to earnings multiples and price to book values between defensives and other commodity and banking names is hardly justified.

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