This Defensive Sector is Poised for Rapid Growth

Have you ever wondered how you can protect your investment portfolio in fluctuating market conditions?

Just as true saints remain unaffected by external circumstances due to their inner contentment, there are certain themes in the stock market that exhibit similar resilience to outside noise.

Defensive stocks, such as those in the IT sector, are known for their stability and consistent performance regardless of economic conditions.

As investors seek stability amidst uncertainty surrounding the new government formation, many are turning to relatively stable sectors for short-term investment opportunities.

Let's take a closer look at couple of major players in this defensive Indian IT sector.

#1 Tata Consultancy Services

First in the list is Tata Consultancy Services (TCS).

TCS has been providing IT services, business solutions, and consultancy services for over 50 years.

It is India's largest software services firm, offering outsourcing and maintaining a diverse client base across 6 continents.

TCS focuses on key business verticals such as financial services, consumer business, life sciences and healthcare, manufacturing, and technology and services.

These verticals make TCS one of the most suitable defensive companies in the Indian markets, given its diversified business.

Its strengths include being the market leader in IT services and outsourcing, as well as having a diversified client base.

Tata Consultancy Services (2020-24)

	FY20	FY21	FY22	FY23	FY24
Revenue Growth (%)	7.16%	4.61%	16.80%	17.58%	6.85%
Net Profit Margin (%)	20.67%	19.83%	20.05%	18.76%	19.14%
Return on Capital Employed (%)	47%	49%	54%	59%	64%
Return on Equity (%)	38.57%	37.67%	43.13%	46.78%	50.94%

Data Source: Screener

The financial results for FY24 show a 7% year-over-year revenue growth, driven by the manufacturing, life sciences, healthcare, and energy resources divisions.

The operating margin for the year increased to 27% due to lower operating expenses.

Over the past five years (2019-2024), TCS has achieved a 10% compound annual growth rate in revenue and an 8% increase in net income.

The share price of TCS has increased by 14% over the past one year, while it has declined by 3% in the past month.

Despite a subdued FY24, the company anticipates improved revenue and profitability in FY25, though specific revenue growth guidance was not provided due to the uncertain short-term demand environment.

However, there are areas of growth in sectors such as insurance, airlines, transportation, and manufacturing.

#2 Infosys

Infosys is the second largest information technology company in India, following TCS. It provides both traditional and digital IT consulting services.

The company's digital services are highly regarded in the industry. About 57% of Infosys' revenues come from digital services, while the remaining 43% come from traditional services.

The main business verticals for Infosys are like TCS, except for life sciences and healthcare.

Instead, Infosys has a division dedicated to energy, utilities, and resources.

Infosys (2020-24)

	FY20	FY21	FY22	FY23	FY24
Revenue Growth (%)	9.82%	10.66%	21.07%	20.66%	4.70%
Net Profit Margin (%)	18.33%	19.33%	18.21%	16.43%	17.08%
Return on Capital Employed (%)	32%	35%	37%	40%	40%
Return on Equity (%)	25.42%	25.44%	29.39%	31.97%	29.79%

Data Source: Screener

Coming to its financial metrices, In FY24, the company achieved a 5% revenue growth.

This growth was primarily fueled by the manufacturing, hi-tech, and communications divisions.

The operating margin for the year remained flat at 24% compared to FY23.

Over the past five years Infosys has witnessed a 13% revenue growth at a CAGR, while the net income has increased by 11%.

The share price of Infosys has increased by 10% over the past one year, while it has declined by 1% in the past month.

Looking ahead to FY25, the company's management anticipates a 1-3% revenue growth in constant currency terms, as opposed to the revised growth guidance of 1.5-2% for FY24.

The company foresees accelerated growth in the financial services and telecom verticals due to significant deal wins.

Additionally, there is a positive outlook on the European markets. Infosys has set a margin guidance of 20-22%, aligning it with the FY24 guidance.

Conclusion

These were two of the largest Indian IT sector companies, with diversified business operations across various segments and strong competitive advantages in their respective areas.

For those seeking short-term stability, these companies could be a safe haven.

However, it's important to note that the defensive theme extends far beyond the IT sector.

In the IT sector too, there are numerous IT companies that you can explore and narrow down using the Equitymaster's IT companies' screener.

Here's a snippet for your reference.

Screen your companies wisely with the horizon of investing in mind.

You can also consider a sector rotational strategy of investing in different sectors as per the peak of those sectors.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...