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Stock Analysis, IPO, Mutual Funds, Bonds & More

Investors flock to sectoral leaders in times of slump

It appears that people are playing it much safer by betting on the leader

Oct 16, 2019, 07.37 AM IST
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For instance, software firm Tata Consultancy Services (TCS) has nearly doubled its lead over rival Infosys in terms of market capitalization during the last two years.
Mumbai: The gap in market value between the biggest company in a sector and the second biggest has widened sharply in the last two years as investors are preferring to back leaders in challenging times. In the past two years, several sectors such as information technology (IT), banking, auto and steel have seen shares of the top company outperforming those of the nearest rival. Market participants say investors perceive the biggest sectoral players as less prone to margin and revenue pressures in a downturn.

For instance, software firm Tata Consultancy Services (TCS) has nearly doubled its lead over rival Infosys in terms of market capitalization during the last two years. Currently, TCS’ market capitalisation is Rs 4.2 lakh crore higher than that of Infosys, while the gap was only Rs 2.4 lakh crore in October 2017, data showed. Similarly, the lead of HDFC Bank over ICICI Bank has increased to Rs 3.8 lakh crore against Rs 2.3 lakh crore two years ago, data showed.
sector-graph

“In this uncertain market, it appears that people are playing it much safer by betting on the leader,” said Ravi Muthukrishnam, head of institutional equity research at Elara Securities. “For many such leaders, multiples expansion is unlikely but earnings visibility remains strong." The gap in net profits has also widened in this period. For instance, the net profit of TCS was Rs 2,200 crore for FY17 against Infosys’ Rs 1,500 crore. In FY19, the net profit of TCS stood at Rs 3,006 crore against Rs 1,472 crore of Infosys.

“Typically, when the market is nervous, and there is lack of broad-based economic growth, investors flock to stocks that offer safety,” said Gautam Duggad, head of research institutional equities at Motilal Oswal. “So, big companies become bigger and consolidation happens.”

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