Quadruple blow: No Band-Aid for consumption stocks as inflation cuts deep

Festival flop, sluggish spending, job drought, and market correction sink consumption stocks

Higher inflation and shrinking consumer purchasing power appear to have taken a bite out of consumption-related stocks, with many seeing a decline in recent months. Analysts believe that the festival season, which peaked from October 28 to November 3, was also underwhelming.

 

According to Ambareesh Baliga, an independent market analyst, many investors have reduced both discretionary and non-discretionary spending over the past few months.

 

“There has been limited job creation, and inflation, too, has hit hard. As a result, consumers — both urban and rural — have likely scaled back their spending. This led to lower offtake for companies, which, in turn, hit stock performance. The recent market correction has also discouraged many investors from putting money into these stocks amid the overall sluggish consumption stats,” he said.

 

A recent note from Nomura paints a mixed picture of the festival season. While demand held up in rural areas and Tier-II/III cities, urban metros and industrial demand remained weak. 

 

 

Hard data from October, according to Nomura, showed stronger growth in two-wheeler sales, while passenger vehicle sales were subdued despite heavy discounting. Sales growth for medium and heavy commercial vehicles also contracted.

 

Anecdotal evidence suggests that retail sales (both online and offline) saw growth during the festival season, but the overall pace of growth was slow.

 

“Our rough estimates suggest a year-on-year (Y-o-Y) increase of about 15 per cent in festival sales growth for 2024, down from nearly 32 per cent in 2023 and 88 per cent in 2022. Within this, retail sales growth was slower for offline stores and higher for online e-commerce platforms, with the latter driven primarily by Tier-II and Tier-III cities. Demand for gold has been lower in volume terms 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.

 

On a macro level, Nomura believes India’s economy has entered a cyclical growth slowdown, with rising downside risks to their gross domestic product growth projections of 6.7 per cent Y-o-Y for 2024-25 (FY25) and 6.8 per cent for 2025-26 (FY26). Both projections are already below the Reserve Bank of India’s estimates (FY25: 7.2 per cent; FY26: 7.1 per cent).

 

HSBC shares a similar view. They note that, with the weather normalising, power demand and growth in mining and utilities have softened. Trade and transport continue to lag, although the tourism sub-sector remains strong.

 

“Most notably, consumption demand is weaker now, across both urban and rural India. 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, the National Stock Exchange’s Nifty India Consumption Index, a performance gauge of consumption-related stocks, has dropped over 6 per cent in the past three months (since August 2024) to date. In comparison, the Nifty 50 has shed 4 per cent in the same period, data reveals.

 

While Baliga suggests that investors should consider a one-year-plus horizon if they wish to buy stocks from the consumption basket and remain selective, Chokkalingam G, founder and head of research at Equinomics Research, expects the pain for 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. Remember, India is a consumption-driven economy, and it will bounce back sooner or later,” he said.