Dream run may continue for consumer stocks

Poor rains may hit rural consumption, consumer staples likely to hold on

In the quarter ended June, foreign investors turned defensive and continued to buy ‘expensive’ consumer stocks. The returns possibly justify their action. The BSE fast-moving consumer goods index returned 34 per cent year-to-date (YTD) and seven per cent over the last month. The auto index returned 15 per cent YTD and three per cent over the last one month. Despite discretionary spends declining, the consumer durables index returned 18 per cent YTD.

Every time consumer stocks rise, analysts rush to say rich valuations are unsustainable. This time, it’s no different. While a set of economists and analysts are saying consumption would start coming off in the coming quarters, another set maintains these wouldn’t. The last slowdown threw up a rather interesting trend in consumption. While urban consumption fell in 2008-09, rural India continued to prop up spending, as ‘Bharat’ had more disposable income. Not surprisingly, rural and urban India now have equal shares in revenues of consumer companies.

However, with the rains playing truant in the first three months of the southwest monsoon, analysts say consumption would come off, as rural disposable incomes would decline. Indranil Pan, economist at Bank of America Merrill Lynch, estimates kharif farm income would fall to 5.5 per cent from 12.4 per cent in 2011 and 37.7 per cent in 2010, owing to the ongoing drought. Essentially, the slowdown would be led by raw cotton farmers, who would see incomes fall seven per cent on a lower-but-still-more-than-demand crop. A lot depends on the rains in September. If rains pick up, the rabi crop would be better than the kharif one.

However, many believe demand would hold up. Nomura says consumer stocks are trading higher than long-term averages, owing to consistent delivery on a quarterly basis, with most companies reporting double-digit volume growth and price/mix-led gains. It claims this trend is likely to continue in the second quarter, as demand has remained robust. Edelweiss Securities says most non-discretionary consumer goods segments are not witnessing any slowdown in growth. From increasing direct reach to expanding rural portfolios, companies have taken various measures to combat the low demand. Thus, analysts believe premium valuations of these companies would continue for some time.