India’s post-pandemic profit resurgence has been overwhelmingly powered by cyclical and capital-intensive sectors, pushing defensives such as FMCG, healthcare and IT to the sidelines. According to Vinod Karki of ICICI Securities, the profit pool share of defensives has dwindled to 16% from nearly 40% in FY21 and is expected to slide towards its historical low of around 14% over the next two years. Their market-cap share has already fallen to ~20% — the lowest since 2011 — from a peak of 30% in 2020.
External shocks have further soured sentiment. A steep increase in H-1B visa fees and 100% tariffs on some pharma products have intensified pressure on IT and healthcare companies, compounding an already weak earnings backdrop.
Historically, defensives bottomed out at a 13% market-cap share during the peak of the 2008 bull market, when their share of profits hovered near 14% and trailing P/E multiples had compressed to about 26x — in line with the market.
Today, the picture is starkly different. The trailing P/E of defensives is still elevated at ~32x versus the broader market’s ~25x, suggesting valuations have room to correct further. FMCG and healthcare trade at 42x and 39x, respectively, while IT, at 24x, has seen the sharpest reset — its market-cap share now trails its profit contribution for the first time since FY13.
“Beyond the normal cyclical underperformance, de-globalisation and inward-looking policies are now additional hoops that IT and pharma have to jump through,” Karki said in a report.
Consumer names are relatively better placed thanks to recent policy support through interest rate reductions and GST rate cuts. However, the biggest beneficiaries are likely to be discretionary consumption plays, not low-end, price-inelastic staples, he added.
Cyclicals valuation re-rating unlikely
On the flip side, the ICICI Securities report said that the valuations of cyclicals are also showing signs of strain. While P/E may not always reflect true value due to earnings swings across cycles, price-to-book remains elevated. The trailing P/B for cyclicals is at 3.3x, below the previous >5x peak but well above early-cycle levels.
Within cyclicals, discretionary consumption and industrials have seen their P/B multiples climb to ~5.9x and ~5.4x from 2.6x and 1.5x in 2020. However, select financials and commodity names still trade at a modest 1–2x, lacking signs of excess, according to Karki.
The broader earnings cycle continues to favour cyclicals. PAT-to-GDP, which plunged to 1.6% in FY20, has rebounded to ~5% by Dec 2024 TTM. Defensive sectors still contribute around 1%, while the bulk of the gains have come from sectors tied to infrastructure, investment and consumption recovery.
If the current momentum holds, defensives may have further to fall before the cycle turns in their favour.
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