Shares of these ‘essential services’ have outperformed benchmark indices; may attract re-rating soon

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Published: June 16, 2020 6:17 PM

While classic defensives offer downside protection only in demand downturns, these virus defensives might prove to be a hedge against the supply disruption as well.

The strict lockdown that India imposed might have paved the way for disruptions in businesses and supply chains but apart from that it also helped in the emergence of a new category of businesses — The Essentials. As equity markets climb up and reach significantly higher from their March lows, brokerage firm Edelweiss says that it is time again to focus hard on businesses, and here the new essential category might as well be a new set of defensive stocks. “Classic defensives are well known, but these new ‘Virus defensives’ proved to be supply hedges,” the brokerage firm said in a report. While a nation-wide lockdown was imposed in the last week of March, the government had allowed just a few businesses to run while others were asked to shut shop temporarily, to curb the spread of the coronavirus pandemic.

As the business of these essentials continued to run while the majority of the industries closed, the fundamentals of these firms might still be strong among others. “Maybe, this added predictability to their earnings trajectory makes them re-rating candidates,” Edelweiss said. The essential services or the virus defensives are different from the classic defensive stocks. While classic defensives offer downside protection only in demand downturns, these virus defensives might prove to be a hedge against the supply disruption as well. These do include the pharma and healthcare sector, which is already considered a defensive sector, but others emerging from the lockdown are; Agri-inputs (fertilizers, ag-chem & seeds), Power, Telecom, Freight rail, Private security, Facility management, Dairy, Express services, and Gas transmission & CGDs. 

Evidently, a large number of the stocks from the ‘essentials’ category have done significantly better than the benchmark indices. Rallis India and Dhanuka Agritech, two of the stocks that Edelweiss lists as the virus defensives have rallied 76% and 146% since their March lows, respectively. Dairy stocks such as Parag Milk, Heritage Foods, and Hatsun Agro have also recouped the majority of the losses registered in March and surged in the range of 50%-80% in the last few months. To put things into context Sensex and Nifty have only managed to climb 30% since the last week of March. Some notable names among these virus defensives listed by Edelweiss include; Tata Power, IGL, Gujarat gas, Godrej Agrovet, Adani Transmission, Adani Ports, Coromandel International, SIS India,Mahanagar Gas, and Container Corp. 

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