Retail vs institutional investors: Who best read the consumption tea leaves?

A Mint analysis of 2,513 listed companies reveals a fascinating convergence of sentiment. Retail investors with holdings up to ₹2 lakh significantly boosted their stakes in both consumption and non-consumption firms during Q3FY25, increasing their holdings by just over 50% sequentially. This suggests a broad-based optimism among individual investors.

However, the institutions were playing a more strategic game. Even as foreign portfolio investors (FPIs) turned net sellers overall during the quarter, they showed a clear preference for consumption-driven companies, increasing their stakes in 44.2% of these stocks compared to just 42% of other companies. 

Mutual funds mirrored this trend, raising their stakes in about a quarter of consumer-focused firms, compared to a smaller 19% of non-consumption companies. This suggests that while retail investors were broadly optimistic, institutional investors were making targeted bets on a consumption-led recovery ahead of the budget announcement.

Also Read: Budget winds fill the sails of retail investors. Will it last?

“Investors are increasing their stake in consumption stocks in anticipation of government support through tax cuts, rural stimulus, or direct income support schemes. A good monsoon has bolstered expectations of strong demand while moderating inflation and the Reserve Bank of India’s (RBI's) liquidity measures could further boost consumer purchasing power, said Ajit Mishra, senior vice president of Research at Religare Broking.

These moves coincided with a market correction: the Sensex fell 7.3% in the December quarter, and consumer-centric companies where stakes increased largely saw declines. Retail investors saw median stock prices fall nearly 8%, while FPIs and mutual funds saw declines of 2% and 7.1%, respectively. 

“In Q3FY25, most consumption stocks saw a correction, prompting investors to accumulate beaten-down stocks with attractive valuations. With upcoming tax exemptions and expectations of a rate cut in the RBI policy, value-driven buying is gaining momentum. However, instead of exiting their entire portfolio, investors are likely to rebalance selectively, focusing on consumption stocks that offer compelling valuations," explains Abhilash Pagaria, head of Nuvama Alternative & Quantitative Research.

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Rate cut hopes

Adding to the optimism, hopes of a rate cut by the RBI are further buoying market sentiment. Retail investors and FPIs, along with mutual funds, are increasing their stakes in consumption-focused companies, capitalizing on attractive valuations following a 7.3% market decline in the December quarter.

However, companies in which stakes were reduced experienced comparatively less severe declines.

Retail investors made some notable moves, including increasing their stakes in established auto players like Tata Motors (2.1 percentage points), Renaissance Global, and PVR Inox (ownership rise of over 100 basis points, quarter-on-quarter). FPIs, meanwhile, favoured Sampre Nutrition, Wonderla Holidays, and Godrej Agrovet. Mutual funds increased their exposure to consumer durables, with higher stakes in PG Electroplast, Crompton Greaves Consumer Electricals, and Gokaldas Exports.

India's economic growth is heavily reliant on consumption. “The Indian consumption story is huge, accounting for 60% of our nominal gross domestic product (GDP). As we have a large emerging affluent class, and this is why the world looks at India favourably, Sandip Raichura, chief executive officer-retail broking and distribution, director at PL Broking and Distribution.

Also Read: FPIs are betting on these stocks despite the market downturn

He, however, also pointed out the challenges. “The last few years have been dominated by non-consumption themes, leaving such stocks either derated or losing steam as the retail economy came under pressure due to multiple headwinds, including margin compressions across the board." Apart from that, job creation has been low, and weather patterns have distorted demand-supply dynamics. Diwali was also a very tepid affair, he said.

Going forward, analysts expect earnings visibility to improve in this segment, the Budget 2025’s shift from a capex-driven approach to a consumption-focused strategy. “The announced tax relief is projected to inject ₹4-5 trillion into the economy, boosting discretionary spending in sectors like FMCG and automobiles," said Prashanth Tapse, senior vice president at Mehta Equities. “This shift is expected to improve earnings visibility and make the sector an attractive investment opportunity in the medium to long term," he added.

Akriti Mehrotra, research analyst, StoxBox,echoed this sentiment. Government policies, particularly income tax revisions exempting incomes up to ₹12 lakh, are expected to fuel a consumption revival, attracting retail investors. Increased focus on rural incomes should further boost spending. This increased disposable income will likely drive demand, benefiting companies in the consumption sector, she highlighted.