Home / Markets / Mark To Market /  Why investors are flocking to consumer stocks

The margin woes of consumer companies have receded, because of easing commodity prices. Among the indicators for improving investor sentiment in these companies is the relative changes in the sector weight composition of the Nifty50 index.

An analysis by Motilal Oswal Financial Services Ltd showed that weightage of the consumer sector rose 180 basis points (bps) to 11.2% in the first nine months of calendar year 2022. One basis point is 0.01%. Improving systemic credit growth and the current scenario of rising interest rates work in favour of banks. Consequently, the weightage of private banks grew 140 bps to 23.3% in the period under consideration. On the other hand, fears of a global recession have marred the performance of technology (IT) stocks. The sector’s weightage has dropped sharply by 530 bps to 13.8%, according to the Motilal Oswal report.

Gaining ground
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Gaining ground

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A key factor driving the consumer sector’s higher weightage is the strong performance of ITC Ltd, shares of which have risen 52%. Prior to this, the stock was beaten down. There were also no adverse tax hikes in the Union budget this year.

The consumer sector is a defensive bet. “In situations of risk or nervousness in the market, investors tend to flock to this sector, which has happened lately," said Deepak Jasani, head of retail research at HDFC Securities Ltd.

Prices of key input materials, such as crude oil and palm oil, have softened from their peaks and this is a relief for consumer companies. Also, price hikes would help. The benefits of these developments will reflect in earnings from Q3FY23 onwards.

The demand environment is also recovering. “While demand trends in July-August remained weak, September has seen good momentum, which is expected to drive value/volume growth for many," said analysts at Edelweiss Securities in a Q2FY23 preview report on consumer staples dated 4 October.

That said, demand in the rural markets could be under pressure because of high inflation.

Meanwhile, the Nifty FMCG index has gained almost 18% so far in CY22, while the Nifty 50 index is down by 0.5%. Valuations of consumer stocks are not exactly cheap, Jasani said. Shares of Hindustan Unilever Ltd and Britannia Industries Ltd trade at 54.5 times and 44.2 times their estimated FY24 earnings, respectively, according to Bloomberg.

“In the slightly longer run, the entry of Adani and Reliance poses a risk to meaningful expansion in valuations. For now, the consumer story is more about earnings growth rather than valuations," Jasani said.

Elsewhere in Mint

In Opinion, Kaushik Basu explains the 'Incarceration Game' that helps authoritarian rulers stay in power. Will recovery in consumer demand hold? Niranjan Rajadhyaksha answers. Biju Dominic reveals an aspect of human nature than can power metaverse. Long Story explains why everyone loves the home loan customer.

ABOUT THE AUTHOR

Vineetha Sampath

Vineetha Sampath is a chartered accountant and is experienced in the field of research analysis. She joined Mint's Mark to Market team recently and this is her first stint in journalism.
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