Is the consumer sector in a bubble territory?

Not yet, as sector could see a pick-up in demand & earnings upgrades

Consumer stocks have risen 138 per cent since 2008 and outperformed the Sensex by 132 per cent. The stocks have propped up the benchmark index over the past two years as even growth continued to slow. But with valuations touching life-time highs, most sell-side analysts believe it's time to sell the sector. Be it pizzas or automobiles, the Indian consumer isn't splurging on anything. The first quarter numbers provide enough proof of demand growth turning negative (when sales grow at a slower pace than inflation). Hindustan Unilever's volume growth in Q1 has fallen to four per cent, while pizza maker Jubilant Foodworks reported a same-store sales growth of 6.3 per cent. The story is not just true for India but also consumption stocks across most Asian economies ex-Japan, which is why these stocks are under-performing benchmarks in several economies.

India, the Philippines and Taiwan are the only countries where consumer stocks are holding up. So, is India's consumer sector in a bubble zone? While the sell-side analysts have been chanting 'sell', global investors are a divided lot. Even as consumer sentiment is weak and this is bringing down growth, what is working for the Indian consumer sector is its relative performance compared to the rest of Asia. Credit Suisse says that views towards consumer sector is more polarised than it has seen in recent memory. However, analysts at Credit Suisse believe that only three markets (India, Hong Kong and South Korea) will have positive consumption momentum in 2013 thanks to a rural push to sales. Also India is expected to be one of the very few markets where the sector's earnings estimates may see an upward revision as macro-economic conditions may turn favourable.

Strategists believe that the Reserve Bank of India's tightening norms will not only bring down growth, but also inflation. Lower inflation would facilitate consumption. According to Morgan Stanley, the macro outlook - high rates for longer, good rains, falling gold consumption and falling inflation - is good for the sector. The brokerage is over-weight on the sector by 200 basis points. Morgan Stanley has an overweight call on United Spirits, Tata Global, Dabur and ITC. The sector is not in bubble territory as the sector's weight is only 11 per cent, whereas history indicates that for a sector to tough-bubble zone, a sector's weight has to touch 30 per cent in MSCI India Index.

However, there are risks to this theory as the sector's valuation premium to MSCI India now stands at 190 per cent, versus the average of 80 per cent over the last five years. The rupee's fall is also not good news for the sector as it offsets the gains from fall in input prices. If volume growth does not pick up as expected, then margins would come under pressure as the companies do not have much head-room in terms of pricing.