Consumption stocks zoom in 10 years despite fall in consumer spend

At a time when reports indicate a fall in consumer spend for the first time in four decades, an analysis of the performance of consumption-related stocks at the bourses over the past 10 years shows a different picture.

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The Nifty Consumption index, a barometer of companies that represent the domestic consumption sector, including consumer non-durables, healthcare, auto, telecom services, pharmaceuticals, hotels, media & entertainment, surged nearly 228 per cent in the last 10 years and has outperformed the frontline Nifty50 that moved up nearly 138 per cent during this period.

Nearly all stocks that comprise the index, except Tata Power that dipped 56 per cent, have given stellar returns. Page Industries, Havells India, Britannia Industries, Titan Company and TVS Motor Company have jumped a huge 1,475 per cent to 3,230 per cent on an absolute basis during this period. Of the 25 stocks that comprise the index, 16 have given a three-digit return, ACE Equity data show.

So, what explains the rise in consumption-related stocks at the bourses at a time when the consumer spend is falling?

“The market has undergone several risk-off phases in the last 10 years – be it the Lehman crisis, debt scare and possibility of a default by countries such as Greece, US – China trade spat, global deflationary conditions around 2016. On the other hand, a fall in oil prices twice to near $30 a barrel also helped these companies improve margins. All this triggered a rush towards safe-haven consumer stocks, which have stood the test of time,” explains G Chokkalingam, founder and managing director at Equinomics Research.

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Vivek Maheshwari, an analyst tracking the sector at CLSA also shares a similar view and says a strong margin expansion allowed consumer companies to report earnings growth well ahead of revenue advances. He expects a gradual recovery over FY20-22, led by improved consumer sentiment and a cyclical recovery, which will also be aided by price hikes at regular intervals. 

“Over the last few years, companies have seen strong gross margin expansion, which are close to all-time highs. The consumer industry has best-in-class return ratios, with sector-wide return on equity (ROE) of around 40 per cent. Heightened investor focus on quality and cash-generating businesses, along with fewer opportunities elsewhere, have led to sharp multiple expansion. Most companies are trading near peak valuations with some of the names trading at a premium to global technology stocks, which offer much better growth prospects,” Maheshwari says.

During 2008-2015, analysts at Morgan Stanley say the consumer staple segment benefitted from a major government stimulus in rural India that coincided with large consumer companies focused on improving brand awareness, availability and accessibility. Going ahead, they expect only a gradual recovery (led by good rainfall and direct cash transfers) in consumer demand, especially given that rural wage growth has remained anaemic. 

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“We continue to favour discretionary and lifestyle consumer stocks that can deliver steady market-share growth. However, headline stock valuations are not cheap relative to history and only companies that can demonstrate acceleration in volume growth, ahead of market expectations, led by market share gains, may be able to sustain current stock valuations,” wrote Nillai Shah, an analyst at Morgan Stanley in a recent co-authored report with Archana Menon, their research associate.

Chokkalingam, too, suggests investors should tread carefully now. “Investors should not get emotionally married to consumption-related stocks and be ready to book profit on a rally,” he advises.

Price for stocks in Rs on NSE; change since Nov 18, 2009 (Source: ACE Equity)