Mumbai — Defensive sectors including FMCG, IT, and healthcare have witnessed a dramatic erosion in their market capitalization share, falling to approximately 20%—the lowest level since 2011—signaling a fundamental shift in India's equity market composition.
The decline marks a sharp reversal from 2020, when these traditionally stable sectors commanded a 30% share of market capitalization. The trend reflects changing investor preferences and evolving economic dynamics that are reshaping the Indian stock market landscape.
Profit Pool Share Contracts Sharply
The erosion extends beyond market cap to actual earnings, with the profit pool share of defensive sectors plummeting to 16% from about 40% in FY21. Market analysts project this share could approach a historical cycle low of 14% over the next two years, underscoring the structural challenges facing these once-dominant sectors.
This dramatic contraction in profit contribution suggests that the shift is not merely a valuation-driven phenomenon but reflects genuine changes in corporate earnings power and sectoral competitiveness.
Valuations Defy Fundamentals
Paradoxically, despite their declining market share and profit contribution, defensive sectors continue to trade at elevated valuations. The trailing price-to-earnings (P/E) ratio for these sectors stands at around 32 times, significantly higher than the broader market's 25 times multiple.
Breaking down the valuations by sector reveals stark premiums: FMCG trades at a P/E of 42 times, healthcare at 39 times, and IT at 24 times. These elevated multiples suggest that investors may still be pricing in historical stability premiums even as fundamentals deteriorate.
IT Sector Faces Unprecedented Challenge
The IT sector has experienced the most severe impact, with its market-cap share falling below its profit share for the first time since FY13. This unprecedented development signals a loss of investor confidence in the sector's growth prospects.
Industry experts attribute the IT sector's struggles to macroeconomic headwinds including de-globalization trends and increasingly inward-looking policies in key markets. These factors are disrupting the traditional offshore services model that propelled Indian IT companies to prominence over the past two decades.
Cyclicals Surge as Defensive Fade
In stark contrast to the defensive sectors' decline, cyclical sectors including discretionary consumption and industrials have witnessed a valuation surge. Their price-to-book (P/B) ratios have climbed significantly from 2020 lows, currently standing at 5.9 times and 5.4 times, respectively.
This divergence reflects investor optimism about India's domestic growth story, infrastructure development, and manufacturing resurgence under government initiatives. The shift suggests a fundamental rerating of cyclical sectors as long-term structural growth stories rather than merely short-term recovery plays.
Market strategists note that the current market composition increasingly favors sectors aligned with India's domestic consumption growth, infrastructure build-out, and manufacturing ambitions, potentially marking a multi-year shift in sectoral leadership.
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