Analysts turn cautious on consumption-related stocks as growth slows

Once flagged as the biggest driver for the economy and the related stocks at the bourses, India’s ‘consumption story’ seems to have run into rough weather in calendar year 2019 (CY19). After a strong mandate to the Narendra Modi – led National Democratic Alliance (NDA) in the general election, expectations were high that the Budget 2019 will help revive the economy. However, the proposals were met with a lukewarm response.

Since the presentation of the Budget on July 5, the Nifty Consumption index has slipped 5.7 per cent (till July 23) as compared to a 5 per cent fall in the Nifty50, ACE Equity data show. On a year-to-date (YTD) basis, the fall has been sharper with the Nifty Consumption index sliding over 9 per cent as compared to a 4.3 per cent rise in the Nifty50 index.

Non-bank finance companies (NBFCs), analysts say, have played a key role in economic expansion for segments that are not catered by banks. Its operational contraction has dented the overall economic growth, they say, and expect the slowdown in consumption to last some more time. The IMF, too, has cut its projection for India’s economic growth by 0.3 percentage point to 7 per cent for 2019-20 citing weak demand.

“Demand/consumption will likely remain tepid due to a higher base, lack of new incomes (jobs), lack of cash availability (government’s push for tax compliance), and dwindling wealth effect (long-held confidence of better future earnings is fading fast). This will further limit demand and consumer confidence. Incremental government spending towards rural India is positive to improve their social health. However, may not translate into incremental consumption as base has already inched higher and incremental government spending isn’t large,” wrote Anjali Verma and Neeraj Chadawar of Phillip Capital in a recent report.

At the company level, the country’s largest and bellwether FMCG (fast moving consumer goods) company, Hindustan Unilever (HUL) on Tuesday reported the lowest volume growth in seven quarters for the April – June 2019 period (Q1FY20). On the other hand, the auto sector – another gauge of consumption and economic prosperity, hit a speedbump with sales on a continuous slide since the past few months.

“Currently, the consumer space is going through a phase where volume growth could be a possible challenge in the coming quarters. Sectors like consumer staples, autos, quick service restaurants (QSRs) and jewellery are already facing multiple challenges. We believe that the current slowdown could possibly tighten its grip on consumer durables,” said at Ashutosh Tiwari, head of research at Equirus Securities.

Among individual stocks that comprise the Nifty Consumption index, auto stocks have been the worst performers. TVS Motor Company, Maruti Suzuki India (MSIL) and Hero MotoCorp have lost 20 per cent – 36 per cent on a YTD basis. Mahindra & Mahindra, too, has slipped over 30 per cent during this period to hit an over three-year low on Wednesday.

Zee Entertainment, Godrej Consumer Products, Colgate-Palmolive (India), Britannia Industries, Avenue Supermarts, United Spirits and HUL are some of the other key losers that have lost 6 per cent – 25 per cent on a YTD basis, ACE Equity data show.

“There is evidence of a slowdown in the short-to-medium term. As a strategy, investors will be better off buying these stocks only from a three-year perspective and should stay away if they want to hold only for the next three – six months. Among the lot, we like HUL, Pidilite, Titan and Marico,” says Gautam Duggad, head of Research at Motilal Oswal Financial Services.