Mumbai: The domestic consumption theme has started playing out aggressively on Indian bourses.
Stocks from fast-moving consumer goods (FMCG) and auto sectors are trading at all-time highs, reflecting the rising demand from India’s 1.2 billion population for everything from cars to cakes.
Even as the broader market continues to hover around a 30-month high, the m’s auto and FMCG indices are scaling new peaks.
Also See Rising Graph (Graphic)
The BSE auto index closed at 8,874.83 points on Friday, after hitting a record of 8,924.54 on Thursday. The FMCG index closed at 3,375.01 on Friday, 1% lower than its Thursday’s close. The Sensex closed at 18,401.82 on Friday.
“Consumer spending will be back on track in 2010-11,” Centre for Monitoring Indian Economy’s latest monthly review said. “We expect the private final consumption expenditure to grow by 8.6% during the year, which is impressive compared with 6.8% in 2008-09 and 4.3% in 2009-10.”
A rise in purchasing power driven by higher disposable income due to tax cuts, higher rural spending by the government and a revival in crop production is going to raise consumption, the report said.
Besides, a good monsoon will help contain raw material prices, especially in the FMCG sector, which was hit by hardening raw material costs in the June quarter.
A Bloomberg report said that the June-September monsoon is forecast to be normal this year, according to the weather office.
India, the world’s second biggest rice grower, may have a record harvest this year, Vijay Sethia, president of the All-India Rice Exporters’ Association, told the news agency this week.
All these translate into more money in the hands of consumers. As consumption increases, so do the profits of the firms which make these goods, making such stocks long-term winners, say analysts.
“Consumption will be the major driver of the economy over the long term and we believe FMCG will play a big role in any broader rally,” said Himani Singh of Elara Capital.
ITC Ltd, which has a 53% weight in the FMCG index, and Godrej Consumer Products Ltd are among the two top firms which are trading at their historical highs. While profits of ITC rose by 22% this quarter after a 27% rise in the March quarter, profits of Godrej went up by 183% after a 12.5% rise in the previous quarter.
Aggregate earnings of 10 firms constituting the FMCG index have gone up 13% in the June quarter.
“People could be buying FMCG stocks as there is some anticipation of a market correction, in which case the fall in this sector would be lesser,” Anand Shah of Angel Broking Ltd said. “We remain neutral on the sector as margins remain under pressure.”
“FMCG is a defensive sector and there are not many sellers as fund managers always retain some allocation for these stocks. This is why any incremental demand can cause a relatively large rise in stock prices in this sector,” said Deepak Jasani, head of research at HDFC Securities Ltd.
Some analysts expect a correction in the FMCG sector, but Singh believes that stocks in the sector could outperform the Sensex over the long term. In fact, the FMCG index has outperformed the Sensex in the past one year by 13%.
While there is no consensus among analysts on the immediate prospects of FMCG, most analysts sounded upbeat about the auto sector, which has been one of the top performers along with banking this quarter and has seen many re-ratings. Aggregate sales of 14 auto firms that constitute the BSE auto index grew by 39.4% after growing by nearly 50% over the past three quarters.
The rise in the auto index is largely driven by Bajaj Auto Ltd, the country’s second largest two-wheeler maker by volume. Stocks of Bajaj Auto as well as Tata Motors Ltd are trading at their lifetime highs. Bajaj Auto is now being included in the Nifty index on the National Stock Exchange. The 50 firms that constitute Nifty are the most liquid stocks traded on the bourse. Bajaj Auto has been posting a triple-digit growth over the past four quarters.
The strong demand for cars, two-wheelers and commercial vehicles may gain further momentum in the ensuing months as auto makers despatch a higher number of vehicles to their dealers, ahead of the festive season, said Vineet Hetamasaria, vice-president, research at brokerage Pincmoney.
Benign interest rates and introductions of new models have helped auto sales in India, Asia’s third largest market, to expand at a healthy rate. In the four months ended July, domestic auto sales rose 29.5% to 4.7 million units, according to the Society of Indian Automobile Manufacturers.
Monthly sales volumes will continue to be strong, says Hetamasaria.
According to Umesh Karne, analyst at Brics Securities Ltd, the auto index, which has started to grow only last year, will continue to expand for another year and a half.
Graphic by Yogesh Kumar/Mint
Ashwin Ramarathinam and Bloomberg contributed to this story.