HUL, Asian Paints: Consumption-related stocks take a hit as inflation bites

Higher inflation and lower purchasing by consumers, it seems, has taken a bite out of consumption-related stocks at the bourses, with most counters losing ground in the last few months. And if analysts are to be believed, the festival season this time around that peaked during October 28 – November 3, has also been tepid.

 

A lot of investors, according to Ambareesh Baliga, an independent market analyst, have curtailed spends – discretionary and non-discretionary in the last few months. 

 

Consumption stocks

 

“There not been much job creation and inflation, too, hit hard. As a result, a lot of consumers – both urban and rural would have curtailed their spending. All this resulted in lower off-take for companies, and in turn, hit the stocks. The recent correction in the markets would also be a deterrent for many investors to invest in these stocks amid overall tepid consumption stats,” he said. 

 

According to a recent note by Nomura, the overall festive season painted a mixed picture for consumption. While demand held up in rural areas and tier-2/3 cities, urban metros and industrial demand remained weak.

 

Hard data for October, Nomura said, showed stronger growth in two-wheeler sales, while passenger vehicle sales have been soft amid heavy discounting, and sales growth for medium and heavy commercial vehicles contracted.

 

Anecdotal data, Nomura said, suggests retail sales (offline and online) rose during this festive season, but overall growth rates were slow.

 “Our rough estimates suggest an increase of around 15 per cent y-o-y in 2024 in festive sales growth, down from nearly 32 per cent in 2023 and 88 per cent in 2022. Within this, festive retail sales growth is slower for offline stores, and higher for online e-commerce platforms, with the latter driven primarily by tier-2 and tier-3 cities. Demand for gold in volume terms has been lower due to higher gold prices, and spot airfares have dropped due to subdued demand,” wrote Sonal Varma, chief economist for India and Asia ex-Japan at Nomura in a recent note co-authored with Aurodeep Nandi. 

 

At the macro level, Nomura believes India’s economy has entered a cyclical growth slowdown and sees rising downside risks to their gross domestic product (GDP) growth projections of 6.7 per cent y-o-y in FY25 and 6.8 per cent in FY26, both of which are already below RBI projections (FY25: 7.2 per cent; FY26: 7.1 per cent).

 

Those at HSBC, too, share a similar view. With the weather normalising, power demand and growth in mining & utilities, they said, have softened. Trade and transport remain laggard sectors, even though the tourism sub-sector is doing well.

 

“Finally, and most notably, consumption demand is weaker now, across both urban and rural India. In fact, a breakdown of manufacturing also shows weaker consumer goods production (even as construction goods remain strong),” wrote Pranjul Bhandari, chief economist for India and Indonesia at HSBC in a recent note with Aayushi Chaudhary. 

 

At the bourses, meanwhile, the Nifty India Consumption index, a gauge of performance of consumption-related stocks at the bourses, has lost over 6 per cent in the last three months (since August 2024) till date. In comparison, the Nifty 50 index has lost 4 per cent since then, data shows.

  Investment strategy  While Baliga suggests investors look at one-year plus horizon now in case they want to buy any stocks from the consumption basket and remain selective, G Chokkalingam, founder and head of research at Equinomics Research expects the pain in these stocks to persist for at least one more quarter.

 

“One can start nibbling selectively at consumption-related stocks early next year. By then, a lot of dust would have settled and inflation levels, too, should not be too alarming. One must remember that India is a consumption-driven economy, and will bounce back sooner or later,” he said.