Play India by buying stocks linked directly to consumers: Axis Mutual Fund

From branded underwear to passenger cars, consumer goods are India’s best stock market bets. And they’re ones you can make money in even when the shares aren’t cheap.

That’s the view of Axis Mutual Fund in Mumbai, whose long-term equity portfolio holds 26 percent in consumer discretionary and staples companies, together the second largest holding after financials. The fund posted average annual returns of 24 percent over five years, beating 96 percent of peers.

“If you want to play India, you need to invest in stories that are directly linked to consumer spending in some form,” Jinesh Gopani, who as head of equities at Axis Asset Management Co. helps oversees about $5.1 billion, said in a recent interview. “In that parlance, even retail-focused banks and select non-bank finance companies are a part of the consumer sector for us.”

A gauge of 255 consumer discretionary companies compiled by S&P BSE gained 54 percent last year on optimism of a revival in demand after Prime Minister Narendra Modi’s cash prohibitions in late 2016 and the the roll out of a nationwide sales tax in July. Government aid for farmers and expectations of normal rainfall have raised expectations of a pick-up in sales in the hinterland, pushing up valuations of these companies

Avenue Supermarts Ltd., operating DMart chain of supermarkets, now trades at a 12-month blended forwards price-to-earning of 80.5, higher than even its own average of 70, as per data compiled by Bloomberg. Similarly, India units of multinational companies like Unilever Plc and Nestle SA have held on to their high valuations even when the parent companies have seen a correction.

“Valuation depends on what is your long term horizon,” Gopani said. “If you feel India is going to grow at 7 percent to 7.5 percent for the next 10 years, consumer companies at the bare minimum can grow at 1.5 times of that GDP growth or maybe more”

Axis Long Term Equity Fund, run by Gopani, has car maker Maruti Suzuki India Ltd., Pidilite Industries Ltd. and Avenue Supermarts Ltd. among its top 10 holdings, five of which are private sector lenders.

“We believe 60-70 percent of the good news is priced in the prices. Going forward, if the real recovery happens, an earnings upgrade is possible in FY20,” he said.