Economic Survey 2019: Strong growth potential for discretionary majors

Economic Survey indicates an increase in spending by households on these, compared to necessities

The Economic Survey, presented on Thursday, had a positive takeaway for companies in the consumption space. It highlighted increased household spending on discretionary items such as clothing, footwear, housing and maintenance, health and education, as compared to necessities.

This would translate to better growth for stocks in the consumption discretionary space such as Bata, Titan Company, Pidilite, and Asian Paints, among others.

Supportive demographics of the country and the geographic spread tilting more towards urban areas were giving a demand boost for the discretionary space. In fact, their urban focus helped some discretionary majors to clock relatively better volume growth in the March 2019 quarter despite the liquidity crunch and overall demand moderation impacting the entire consumption sector.

Most staple companies (which sell essentials such as food, personal care, etc.), on the other hand, had reported either a deceleration or flat volume growth on a sequential basis in the March quarter.

On a full-year basis too (FY19), volume growth of these companies was ahead of average volume growth of major staple players such as Hindustan Unilever, Dabur, Britannia, and Colgate Palmolive, among others.  

“Discretionary companies are mainly focused on urban areas. Thus, they are in relatively better shape and are likely to perform better than the staples,” said Nitin Gupta, analyst at SBICAP Securities.

Further, the goods and services tax (GST) along with brand loyalty would also help the organised players gain market share away from the unorganised segments. For instance, in case of jewelry, the GST and brand trust for Tanishq augurs well for Titan. Same is the case for Bata in the footwear category.

The Survey also highlights the share of the working-age group in the population pie would expand to about 60 per cent by 2041 from 50.5 per cent in 2011, further strengthening the growth outlook of discretionary products.

Major players such as Asian Paints, Titan, and Bata among others are well placed to cash in on these opportunities and have lined up new launches and expansion their distribution network. In fact, the new-age distribution channel — e-commerce — should help gain market share further by making goods available at the consumers’ doorstep. The discretionary segment is also preferred (compared to some other sectors) given growth prospects as well as little or no debt status of the segment, said experts.

But the caveat is high valuations. Companies such as Titan are currently trading at 33 per cent above its long-term historical average valuation.

G Chokkalingam, founder and managing director at Equinomics Research, said, “Discretionary is a relative safer space for investors and many other sectors are not performing satisfactorily. Therefore, high valuation may not weigh on the stock performance of discretionary segment materially.”

Bata, Titan, Pidilite and Asian Paints are the top long-term picks of brokerages.

• Urban focus and goods and services tax
• Share of working-age group in overall population to expand
• New launches, distribution/store expansion
• Muted performance by other sectors