Analysis: In India's sizzling stock market, consumer stocks rise 18% but are laggards

Procter & Gamble Hygiene and Health Care

26/03/2024 01:30

By Bharath Rajeswaran
       MUMBAI, March 26 (Reuters) - The yawning divide between
the super-rich and middle-class in India's booming economy is
set to persist, if the "underperformance" of consumer stocks in
the raging stock market is anything to go by.
    Stock prices of consumer firms selling soap, hair oil and
refrigerators are seeing double-digit gains but are still
lagging benchmark Indian stock indexes as low income growth and
volatile inflation hurt demand for everyday goods. Meanwhile,
luxury goods are flying off the shelves.
    The macro trends bear that out. Asia's third-largest economy
is set for a 7.6% expansion in the financial year ending this
month, but private consumption, which contributes 60% of
economic growth, is expected to grow at just 3% - the slowest in
two decades, excluding the COVID-19 pandemic years.
    The wealth gap has widened. The wealth concentrated in the
richest 1% of the world's most populous nation is at its highest
in six decades, research group World Inequality Lab said.
    "There is a drastic shift in household income from lower to
higher middle class and from higher to upper class that is the
driving engine for the growth in the premium segment," said
Vineet Arora, managing director at Singapore-based NAV Capital,
which manages 8 billion rupees ($95.95 million) in its Global
Opportunities Fund. 
        The premium segment, comprising companies that sell
cars, high-end electronics, expensive watches and jewellery, is
seeing brisk business and soaring share prices. Tata group-owned
Titan Company  TITN.NS  has seen its share price rise 44.3% over
the past 12 months while luxury watch retailer Ethos  ETHO.NS 
has gained 162%.    
    In contrast, the gauge of fast moving consumer goods (FMCG)
firms, the Nifty FMCG  .NIFTYFMCG , has risen 18% over the past
year, compared with the benchmark Nifty 50  .NSEI  which is up
30% and near record highs.
        Four of five fund managers that Reuters spoke to said
they expect this relative underperformance to persist for
another two or three quarters, till economic growth broadens.
    "While the premium segment offers some growth potential, a
broader sector revival relies on improved rural demand and
government initiatives," Arora said.
        Consumption in segments that cater to groups where
income growth is weak has been tepid, said Sonam Udasi, senior
fund manager at Tata Asset Management, which is underweight FMCG
stocks in its India Consumer Fund.
    Out of 90 FMCG categories tracked by market research firm
Kantar, half either saw a drop or no change in consumption in
2023, it said in a report earlier this month.
    Hindustan Unilever (HUL)  HLL.NS , the Indian arm of UK's
Unilever  ULVR.L , posted just a 0.6% increase in
October-December quarterly profit while sales slipped as
competition in the consumer goods space heated up and demand in
rural regions remained low.
    The stock has been among the worst performers in the
benchmark Nifty 50 index  .NSEI  and the worst performer in
consumer index  .NIFTYFMCG , down 8.4% over the past 12 months.
   
    COST OF LIVING
    Manjunath, 35, works at a dry cleaning shop in Marathahalli,
Bengaluru, and has to support a family of five on his monthly
income of 30,000 Indian rupees ($360).
    Rising prices for staples such as vegetables and the popular
'surti kolam' rice, means he had to cut other spending.
    "I had planned to buy a refrigerator before the summer. But
I have not been able to save enough for that," he said.
    But for consumers in a slightly higher income bracket, such
as Ganesh Kumar, who works at a leading technology firm in
Chennai and earns 120,000 rupees per month, big ticket purchases
such as jewellery or family holidays have become affordable.
    "After COVID and work-from-home, a lot of expenses have come
down for people like us. Now I spend on comfort," he said.
    In an index of consumer durables  .NIFCODU , 10 of the 15
stocks, including refrigerator maker Voltas  VOLT.NS  and
popular washing machine manufacturer Whirlpool WHIR.NS , have
underperformed benchmark indices in the current financial year.
    Foreign investors have sold a net 31.35 billion rupees worth
FMCG stocks in the last 12 months and 79.45 billion rupees of
consumer durable stocks. They have, however, poured in 1.81
trillion rupees into Indian stocks over this period.
    "The story of premiumisation is unfolding in the consumption
space," said Nirali Bhansali, equity fund manager at SAMCO
Mutual Fund, which is underweight both consumer staples and
durables, and positive on stocks such as Ethos and Titan but
worried they are too richly valued.
    The FMCG index is trading at a decade-high 51 times 12-month
forward earnings and the consumer durables index at 69 times.
Fast rising stocks such as Titan and Ethos are above that, at 93
and 82 times, respectively. 
    The shift to premium brands is still in its infancy in India
and will pick up further in the next decade as incomes increase,
said Abhijit Bhave, managing director and CEO of Equirus Wealth,
a wealth management firm with assets worth over $900 million
under management.
    "Evolving consumer preferences, changes in lifestyle
patterns, and the increasing willingness of certain consumer
segments to spend more on premium products despite economic
uncertainties are leading to this transition."

    EBITDA margins of consumer companies catering to mass demand
are at 19%-32%, aided by moderating commodity prices and cost
optimisation measures to offset the impact of tepid sales, while
the margin growth of companies in premium segments like Titan
and Ethos hover around 10%-20%, due to volatility in gold
prices.
    However, volume growth of companies in the premium segment
is at 10%-16%, compared to sub-5% growth of companies in the 
mass segment, according to Aishvarya Dadheech, chief investment
officer at Fident Asset Management.
($1 = 83.3512 Indian rupees)

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Private consumption lags India's GDP growth in fiscal 2024    https://reut.rs/4anplvn
Consumer stocks underperform India's Nifty 50 in last 12 months 
  https://reut.rs/4a8t1BG
Volume growth trends at < 5% for India's consumer companies    https://reut.rs/3x15K5Y
FPIs offload shares of consumer stocks over last 12 months    https://reut.rs/43rGyS2
While India's stock market sizzles, the consumer sector gets a
discount    https://reut.rs/3VADuRA
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Reporting by Bharath Rajeswaran; Editing by Vidya Ranganathan
and Kim Coghill)
 ((bharath.rajeswaran@thomsonreuters.com; +91 9769003463;))