Consumer discretionary index hits all-time high; analysts see more upside

The recent optimism at the bourses stems from the hope that consumers will resort to 'revenge buying' once the lockdown condition is lifted following the second wave of Covid infections receding

Shares of consumer discretionary companies continued to march ahead on Tuesday with the S&P BSE Consumer Discretionary Goods & Services index hitting a fresh record high at 5,104 in intra-day trade. In comparison, the benchmark S&P BSE Sensex was up 0.54 per cent at 52,835 points. 

In past two months, the BSE Consumer Discretionary index outperformed the market by surging 13.4 per cent, against 8.2 per cent gain in the benchmark index. Analysts believe there is still more room for an upside, but investors need to be selective. 

The recent optimism at the bourses stems from the hope that consumers will resort to ‘revenge buying’ once the lockdown condition is lifted across most part of India following the second wave of Covid infections receding.

“The pent-up demand will get released post lockdown and benefit a number of consumer discretionary companies. The sector has emerged well from demonetisation and goods & services tax (GST) hits. Large organised players are better placed than the unorganised ones now. That said, one cannot paint the entire sector with the same brush. While there will be winners across the spectrum, the growth trajectory of each will be different. There is more headroom for the stocks,” said AK Prabhakar, head of research at IDBI Capital.

However, a recent survey findings of BCG India conducted between May 23 and May 28, 2021 among 4,000 consumers suggests that consumer's willingness to spend is on the wane, especially after the second wave of Covid infections. The latest round of survey, according to BCG India, had 51 per cent consumers expecting spends over the next 6 months to be lower compared to 40 per cent in the last round.

“The spending sentiment has not been impacted similarly across categories. Essentials, health, in-home entertainment continue to be winners. Some of the discretionary categories, however, have been negatively impacted,” said Nimisha Jain, managing director and partner, BCG India.

At the bourses, Asian Paints, Avenue Supermarts, which owns the hyper-retail chain DMart, Titan Company and Westlife Development, which runs McDonald’s restaurants in western and southern India, hit their respective record highs on the BSE in intra-day trade on Tuesday. 

“The second half of FY22 will be better for consumer discretionary companies as the pent-up demand gets released. Companies, on their part have become smart and have rationalised costs, which will positively impact their margins. That said, one needs to be stock specific while investing,” said Abhishek Jain, head of research at Arihant Capital.

Dollar Industries, Endurance Technologies, Filatex India, Garware Technical Fibres, Minda Corp and Minda Industries were among the other BSE Consumer Discretionary index counters that hit their record high on Tuesday.

Amarjeet Maurya, assistant vice-president for mid-cap research at Angel Broking believes the larger, organised players are benefitting at the expense of the smaller, unorganised ones.

“The unorganised sector continues to be plagued by liquidity issues and a number of companies are suffering as a result. This will continue. The demand for consumer discretionary items should start trickling in from the second quarter of the current fiscal (FY22) and gain momentum in Q3-FY22 onwards, provided there is no third wave / relockdown. Growth in earnings should support valuations and keep investor's interest alive in these stocks,” he says.

Consumer discretionary stocks