Jubilant Food, Bata: Consumption stocks get leg up amid festive boost

Nine-day Navratri festival saw retailers witness the highest footfalls in two-three years across segments such as automobiles, consumer appliances, and apparels

Revival in consumer sentiment is set to boost consumption-related stocks this festive season, believe analysts. According to those at Prabhudas Lilladher, consumer demand remained steady during the July-September quarter (Q2FY23), despite price hikes and inflation, and persistent rural weakness.

The positive sentiment spilled over to the recently concluded nine-day Navratri festival that saw retailers witness the highest footfalls in two-three years across segments such as automobiles, consumer appliances and apparels.

"There exists a huge pent-up demand across quick service restaurant (QSR), Apparel, and Retail segments. Discretionary demand remained strong, more so with high sales proportion from middle, and upper-middle class of population," wrote Amnish Aggarwal, in a co-authored report with Harish Advani, and Anushka Chhajed for the brokerage.

At the bourses, most of the consumption-themed stocks have outperformed the markets during the first half of this fiscal (H1FY23). Varun Beverages, TVS Motor Company, M&M, Westlife Development, Eicher Motors, ITC, and HUL were among the top gainers, rallying between 32 per cent and 66 per cent. In comparison, the Nifty50 index slipped 2 per cent, Nifty FMCG index rose 22.4 per cent, and Nifty Consumption index added 15 per cent during the period, ACE Equity data shows.
 

Demand trends

Segment-wise, demand for personal care products like skin creams, and hair oils has held up in the urban market, while rural demand continues to be impacted due to higher retail prices. In the packaged food category, all pack sizes reported recovery in demand in Q2FY23.

Demand trends, Prabhudas Lilladher noted, were similar to Q1FY23, but are higher on a YoY basis. Products such as Milk and Dairy Whitener saw higher value growth relative to volume growth. Cigarette demand, too, was strong with high single digit to low double-digit industry growth. Among discretionary products, jewellery demand was muted during the recently concluded quarter, while watches witnessed strong YoY sales.

"Weekend footfalls in malls and restaurants continue to go up at 3x versus weekdays. Further 6-12 per cent price increase taken by quick service restaurants (QSRs) has also been well accepted," the brokerage said.

With the advent of the festive season, especially without the shadow of Covid-19, Nishit Master, Portfolio Manager of Axis Securities PMS likes EIH, Aditya Birla Fashion and Retail, Maruti Suzuki, M&M, Tata Motors, Westlife Development, Jubilant Food, Trent, and Bata.

Word of caution

That said, inflation remains a key anchor for demand, and analysts suggest investors keep an eye on any uptick in prices to uncomfortable levels. In this backdrop, companies may alter their production plans amid demand destruction, which in turn can impact their financials and ultimately stock performance at the bourses.

"Production of around 43 per cent of items of consumer non-durables declined between April-July this year, compared to the same period of previous year. Production of around 50 per cent of these FMCG items are still below the pre-pandemic level. Thus, concerns of growth slowdown emanate from decline in production of daily usage items," a note by BoB Economic Research cautions.

That said, Deepak Jasani, head of retail research at HDFC Securities believes a sustainable recovery in rural FMCG growth would be the next big trigger for the sector.

"We expect material gross margin expansion over FY22-24, bringing it closer to FY20 levels, assuming normalisation of input costs, and partial reversal of price hikes over the next two years. While operating cost savings, witnessed during pandemic years, could reverse due to higher marketing, the overall cost structure will still be below FY20 levels, leading to a better EBITDA margin profile," he said.

Valuation-wise, the earnings multiple of large FMCG companies is around 50-65x one-year forward earnings per share (EPS). However, as competition intensifies due to the entry of Reliance Industries, and Adani Wilmar into the FMCG market, Jasani expects valuation multiples to remain stable or erode marginally in the medium term.

Analysts also suggest investors add high quality consumption stocks, like kitchen appliances, and electrical goods, for the long-term as they benefit from the tailwinds of government push on cooking gas, and infrastructure in the hinterland.