Consumption story back in vogue; stocks rally
BSE Consumer Discretionary Goods and Services and BSE Auto are among the top five performers among indices since the end of July
Mumbai: India’s consumption story is picking up and making its first concrete signs visible, boosting related stocks, and analysts say these gains are here to stay as along with firm urban demand, rural demand too is now turning around.
A good monsoon after two successive years of drought, coupled with implementation of the 7th Pay Commission, is set to boost rural consumption.
BSE Consumer Discretionary Goods and Services and BSE Auto are among the top five performers among indices since the end of July, with gains of 7.77% and 8.05%, respectively, and are expected to rise further with signs of a revival in consumption demand. The benchmark Sensex index rose only 1.01% in the same period.
JK Tyre & Industries Ltd, Gitanjali Gems Ltd and TVS Srichakra Ltd were the top gainers among the components of BSE Consumer Discretionary index since the end of July. These stocks jumped 75.38%, 70.70% and 64.58%, respectively, in the period.
“The monsoon turned out to be largely in line with the expectations of a good rainfall. This will improve the agricultural economy. Also, it creates more money in the hands of consumers, which will find its way into a rise in consumption,” said Rakesh Rawal, head of private wealth management at Anand Rathi Financial Services Ltd.
Crisil Research expects private consumption to rise by 90 basis points to 8.3% in the current fiscal year, as a near normal monsoon with the best distribution of monsoon in the last three years will push up agricultural gross domestic product (GDP), it said in a report on Sunday.
One basis point is one-hundredth of a percentage point.
Southwest monsoon season in Asia’s third-largest economy ended with rainfall that was almost normal at 97%, leading to record sowing and filling of reservoirs with sufficient water after two years of drought. India recorded a rainfall deficit of 14% and 12% in 2015 and 2014, respectively.
According to Rawal of Anand Rathi, consumption growth is here to stay. The large growth is likely to be on the rural side. He added that urban consumption was not a big worry earlier, and it seems to be faring fine as well.
Sales at most auto makers rose in September as firms stocked dealerships ahead of the festival season that starts in October. Cumulative sales of the top 10 passenger vehicle makers touched 274,615 units, up 21% from a year ago, according to monthly sales data from auto firms.
Auto ancillary firms MRF Ltd and Bharat Forge Ltd topped the gains among the constituents of BSE Auto index since the end of July. They jumped 51.75% and 21.66%, respectively, in the period
Car maker Maruti Suzuki India Ltd followed next, and it continued to log nigh highs. It touched a record high of ₹ 5,740 on Tuesday. The stock has run up 20.22% since July-end.
Nilesh Shah, managing director of Kotak Mahindra Asset Management Co. Ltd, pointed out that the festivals of Onam, Nuvakhai, Durga Puja and Ganpati in respective states of Kerala, Orissa, West Bengal and Maharashtra have boosted demand.
“Good monsoon will boost consumption demand in rural areas, while OROP (One Rank One Pension) and Seventh Pay Commission will support both rural as well as urban consumption,” said Shah.
“E-commerce bonanza is also driving consumption,” added Shah.
Online e-tailers Flipkart Internet Pvt. Ltd and Amazon India both claimed record sales numbers in their respective festival sales events over the weekend, affirming that urban consumption remained firm.
That said, BSE FMCG index was the odd one of the pack. The index has declined 2.03% since July.
Apparently, the competition by unlisted players was not only eating into market share, but also margins.
“There is a fairly high degree of competition from unlisted players such as Patanjali and Ghadi detergents, which are squeezing the margins for the listed companies,” said Shah of Kotak
On the other hand, there were some worries that the valuations could be already in the expensive zone after the recent run up.
BSE Consumer Discretionary index trades at 1-year forward price-earnings (P-E) ratio of 21.96 times, which was a premium of 12.89% over its 5-year average. BSE Auto index trades at 17.29 times 1-year forward P-E, at a premium of 42.02% of 5-year average.
“There could be earnings upgrades for various consumption-linked companies, and this will increase the growth for market. The valuations of some of these stocks may look stretched, but if earnings are set to be revised upwards, they would look fine,” said Rawal of Anand Rathi.
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