Consumer goods stocks are some of the best performing shares over the past year. Consumer durables and healthcare stocks hover around the top, while realty, capital goods and metal company shares bring up the rear. At first look, that is not surprising.
After all, the general perception is that investment demand has been falling while Indians are still going shopping.
However, a look at the recent Index of Industrial Production (IIP) data and the company-level earnings shows that things aren’t so clear-cut.
It is true that the capital goods production numbers, while wildly fluctuating month after month, have been on a downward trend for a long time.
After all, the Reserve Bank of India has hiked interest rates 13 times since March 2010. It is a no-brainer that investment demand is falling.
As Mint reported recently, the actual capital expenditure spend has fallen 45% in the first half of the fiscal compared with a year ago.
But, lately, consumer demand has been moderating as well, especially over the past couple of months. If one looks at IIP numbers over the course of the current fiscal, capital goods production grew 4.6% from a year ago, a steep decline from 16.4% a year ago.
However, consumer goods output grew slower at 4.5%, less than half of the 9.1% growth seen a year ago.
Within that category, consumer durables grew 5.2%, while consumer non-durables (essentially fast-moving consumer goods, the stocks of which have grown as opposed to a decline in the broader market) grew at a sedate 3.8%, the same as a year ago.
A look at the earnings of the pure play consumption and capital goods (or investment) firms in the BSE-100 Index tends to confirm that the difference is minimal.
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Pure play consumption firms—including food, personal care, pharma, telecom and fertilizer companies among others—have reported a combined net sales growth of 18.9% in the September quarter over a year ago.
Their net profits declined 4.7%, suggesting that pricing power is also limited.
In comparison, investment demand-led companies (steel has been included here although some products such as flats are more consumption-driven) reported a 16.5% growth in net sales and a 9% decline in profits.
So what justifies the relative outperformance of consumption-led stocks?
Perhaps, it has to do with the fact that they will be the first to recover when things turn around. Inflation has to fall first, before interest rates go down, and a fall in price levels will drive consumption.
Consensus brokerage estimates from Bloomberg for the second half of this year supports this hypothesis.
For consumption-driven firms (this sample is smaller than the one used above and includes very few pharma firms), brokerages expect profits to grow at 24%. For investment-demand-led firms it is a sedate 3.7%.
Graphic by Yogesh Kumar/Mint
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