Thread: Hardening rates force investors to play defensive

Hardening interest rates are prompting investors to take shelter in stocks of companies less sensitive to the rising cost of borrowing. This has also been apparent in the trading pattern in the current market, reeling under the pressure of economic crisis.

While the market has become extremely volatile, stocks from select sectors such as FMCG, IT and pharma have been outperforming the broader market. In a rising interest rate scenario, companies in these sectors are perceived to be defensive bets because they are either debt free or have significantly lower borrowings in their balance sheets, according to analysts.

This distinguishes them from many other debt-heavy corporates, which are likely to witness mounting pressure on margins owing to high cost of borrowing, they say.

FMCG major Hindustan Unilever (HUL) emerged the winner in an otherwise choppy market, as the stock gained 3% to Rs 238 on Tuesday. On Wednesday, it rose 0.5% to Rs 238.6, thus recording monthly gain of 16% against Sensex’s 6% rise.

While the company released better-than-expected second quarter numbers last week, its low cost of borrowings also helped the stock survive the bear onslaught. The BSE FMCG index ended flat even while all other sectoral indices fell sharply on Tuesday.

HUL’s total borrowings have reduced significantly from Rs 1,471 crore as on December 31
2004 to Rs 89 crore as on December 2007.

“When the market becomes volatile or choppy, the strategy is to protect investments. Cash-rich companies become a safe haven for investors in such conditions,” said Prabhudas Lilladher’s head of research Ranjit Kapadia. Investors would mostly like to bet on stocks of FCMG and pharma companies where cash flow is strong and working capital is negative, he says.

IT major Infosys Technologies also swam against the tide with a modest rise of 0.1% at Rs 1,539 on Tuesday and extended gains to end 4% up at Rs 1,603 on Wednesday.

Being a zero-debt company, investors latch on to the stock whenever the market goes into a tizzy over inflation and interest rate concerns, said an analyst.

A few public sector companies also gained ground on the back of defensive buying. For instance, Hindustan Zinc emerged as the biggest gainer, ending 3.2% up at Rs 533.3 on Tuesday. The stock jumped 6.8% to Rs 589 on Wednesday.

The company’s total debt was of Rs 558 crore as on March 31 2006, which came down to a mere Rs 39 lakh as on March 31 2007.

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