Consumer staples likely to struggle with low volume growth

Analysts expect strong revenue growth from categories like oral care, packaged foods and jewellery

Consumer stocks have lost favour with investors since growth began slowing from FY13. Analysts now believe demand has largely stabilised with volume growth settling in single digits for consumer staples. While the economy is expected to revive and consumption could pick up, not all consumer companies are expected to grow at the same pace.

Rather than chasing earnings and margins, investors are looking at betting on segments and categories where revenue growth is expected to be strong. While analysts are factoring in 12-17 per cent growth for the consumer staples companies, the blue sky opportunity clearly lies in categories like packaged foods, jewellery and oral care. Emkay Global expects a normalised 12-17 per cent revenue CAGR (compounded annual growth rate) for consumer staples and 12-20 per cent earnings CAGR over FY14-17.

The outlook for consumer staples is expected to remain weak as analysts believe that there are no fresh policy triggers from the government that can spur consumption. According to Elara's report on the sector, volume growth rates in rural fast moving consumer goods (FMCG), which have come off substantially into the mid single digits, would remain at such low levels for some time until fresh drivers emerge in the form of government policies, an increase in the price of foodgrains and a better monsoon season.

Given that the volume growth for staples is expected to languish at current levels, investors have started looking for consumer stocks where the revenue momentum is expected to be stronger. Goldman Sachs has taken a long-term view on the sector to figure out companies that will report superior revenue growth rates. As such, companies have outperformed the sector by 20 per cent.

Currently, the FMCG sector (ex-ITC) is trading at 37.9 times 12-month forward price/earnings multiple and the sector is trading at a 130 per cent premium to the broader MSCI India. According to the research team at Goldman, the earnings before interest and tax profit pool (in $ terms) for the Indian consumer sector has the potential to grow seven times to $75 billion by 2030 at 12 per cent CAGR.

The brokerage believes sub-sectors such as restaurants, jewellery and foods are likely to grow faster by 440 basis points than overall sector sales through 2030. As a result, Goldman Sachs analysts have put a 'buy' rating on Titan, Jubilant, ITC (on conviction list), and Godrej Consumer.

Emkay Global, which is factoring in a secular pick-up in demand for the sector, also has a bias for price maker categories such as oral care, malted foods, infant nutrition, noodles and cigarettes. Least in favour are price taker categories such as soaps, detergents and hair oils — given the competitive intensity and high penetration levels.