Consumption story: In top gear

Resilience of domestic consumption will keep valuations at relatively high levels.

The fourth quarter GDP figures may have shown a marked slowdown across all segments of the economy, but consumption has kept the flag flying high. The Indian consumption story remains intact, despite rising prices and an imminent slowdown. Be it autos, consumer goods or lifestyle products, Indians are consuming a lot more of everything. This is forcing investors to take a relook at consumer companies, even as profits come under pressure.

India’s consumption story is expected to stay on the growth track, with some adjustments in the short term. Private consumption is expected to grow at 14 per cent for the next three years. Ambit Capital believes this growth will be driven by three factors — inclusiveness, mix changes and specific consumption categories.

On an overall basis, India’s consumption had a compounded annual growth rate (CAGR) of 14 per cent over FY05-10 and is expected to sustain. In the organised space, the revenue CAGR for food has been 16 per cent, whereas in the non-food staple space, it was about 8 per cent.

However, the non-food discretionary spend has witnessed 18 per cent growth between FY01 and FY10. While the share of staples will fall, discretionary and services segment will continue to outpace the overall growth. Both discretionary and services currently contribute 18 per cent and 42 per cent, respectively, of overall consumption.

What will drive consumption is the ever-evolving profile of the Indian consumer. Despite the slowdown, categories such as packaged food, consumer durables, home care and lifestyle retailing, will continue to outpace the overall consumption growth, thanks to changes in consumer behaviour.

Given that India will rank among the top 10 markets for most multinational consumer companies, the sector is nowhere near running out of steam. Focus of MNCs on the Indian markets will remain high, as India’s contribution to overall global consumption markets is expected to exceed 5 per cent by the end of decade and it will rank amongst the top 10 markets in several consumer categories.

As is currently visible in the auto sector, select multinationals will emerge as challenger brands in key categories.

Consumer indices have outperformed the broader Indian markets since April 2009 and the relative P/E valuations for consumer stocks are now back to their long-term levels of 1.5x markets.

Analysts believe these relative valuations can be sustained, considering the resilience seen in the Indian consumer market.