7th Pay Commission: Shot in the arm for consumption stocks

If the state governments too follow the Centre's footsteps, it should have a positive impact on consumption related-themes across markets both urban and rural

The BSE Auto Index, led by Hero MotoCorp, gained as much as 1.5 per cent after the Cabinet approved the Seventh Central Pay Commission recommendations.

The pay increase (salaries and allowances), which translates to a Rs 1 lakh crore pay-out annually, would benefit about five million employees and 5.8 million pensioners. If the state governments also follow the Centre’s footsteps, consumption related-themes across urban and rural markets could see a boost.

If the impact of the Sixth Pay Commission was taken as benchmark, automobiles should benefit the most from these recommendations. In FY10 and FY11, sales of two-wheelers and cars were up 25-26 per cent, while consumer durables sales were up 2.5-3 per cent. Some benefits in the form of interest-bearing advances for purchase of two-wheelers and cars have been done away with. But with the absolute pay-out almost double  of the Sixth Pay Commission, higher demand would be seen in various industries.

Given the differences, CRISIL Research said sales of passenger vehicles and two-wheeler would see an incremental push of 4-5 per cent. Small cars would benefit the most. Two-wheelers, too, should see traction as most employees were based in urban centres. Hero MotoCorp (up 4.6 per cent) and Maruti (1.4 per cent higher), the key auto gainers on the stock exchanges, would benefit the most.

CRISIL said it expected 1-1.5 per cent additional volume growth in the consumer durables space, and there could be broad-based growth in televisions, refrigerators and washing machines. The BSE Consumer Durables ended 1.3 per cent higher on Wednesday.

Analysts said smaller-ticket white goods (fans, home appliances and electrical) would see an uptick, benefitting companies such as Crompton Greaves and Havells. Real estate, too, should get a boost, especially in the semi-urban space, given the government’s policies related to low-cost housing. All allied sectors, including cement, would see good demand on the back of this, it said.

The pay raise might not lead to higher inflation, said economist in rating agencies, given the deflationary trends in commodities and underutilised capacities. However, India Ratings Chief Economist Devendra Pant said, a rise in demand might improve capacity utilisation and also help revive the investment cycles earlier than expected.

The overall impact might not have a compounding effect like the last time. Kotak Institutional Equities said the previous increase, which came during the Lehmann crisis, was accompanied by a stimulus, which included excise duty reduction to eight per cent (from 16 per cent), a 425-basis-point policy rate cut between October 2008 and April 2009, favourable government policies for the rural economy and robust private sector investment.

Dharmesh Kant, head of retail research, Motilal Oswal Securities, said the increase was coming on the back of a higher base and inflation would remain low. He said investments and consumption would get a boost across sectors.

Edelweiss analysts’ top picks included Titan, Asian Paints, Berger, Shoppers Stop, Aditya Birla Fashion, consumer durable companies, Jubilant Foods, Westlife, PVR, Inox and Future Retail. “Also, media companies like Zee Entertainment, Jagran and DB Corp will benefit as discretionary stocks will increase ad spends,” said Abneesh Roy, a senior vice-president at Edelweiss.