Existing investors in consumption-oriented funds should stay for long term

India’s consumption story appears to have hit a temporary bump. Demand has slowed visibly in segments like automobiles, especially personal transportation, and fast-moving consumer goods (FMCGs). It is not yet as starkly visible in the discretionary segment. Investors who have bet on funds focused on the consumption theme should be prepared for weak returns from these funds in the near term.

One factor responsible for the slowdown is the base effect. “The implementation of the goods and services tax (GST) resulted in a decrease in tax rates on many of these goods, due to which they enjoyed a volume boost over the past year and a half. Organised players gained market share over unorganised players in the aftermath of demonetisation and the GST. The higher base is one of the factors contributing to lower volume growth now,” says Ankit Jain, fund manager, Mirae Asset Mutual Fund, who manages Mirae Asset Great Consumer Fund.

Some experts are of the view that the long-term impact of the implementation of the GST and demonetisation is getting manifested now. These policy changes affected smaller businesses, which contribute to job creation in a big way, more adversely. The first-order impact was on these businesses, then on job growth, and finally on consumption spending.

In urban areas, the crisis in NBFCs and housing finance companies has also taken a toll. “It has led to slower credit disbursal by these players,” says Ankur Maheshwari, CEO, Equirus Wealth Management. Banks, too, have grown more cautious about lending. These tighter credit conditions have affected spending. In urban areas, poor returns from real estate investments have affected consumer sentiment. In rural areas, per capita income growth has slowed over the past five years. “While input costs have continued to rise, farmers’ remunerations have not kept pace,” says Jain. This has affected their purchasing power.

Event-specific factors are also at play. “Consumers tend to defer large-ticket purchases during election time,” says Sonam Udasi, fund manager, Tata Mutual Fund, who manages Tata India Consumer Fund. He, however, adds that such slowdowns happen within the staples segment every three years or so, hence investors should not get unduly worried.

Most experts suggest existing investors in consumption-oriented funds should stay put. The reason: India’s long-term consumption story remains intact. “India’s per capita income doubled over the past 11 years. How fast it doubles again will depend on government policies and other factors, but generally, it tends to double faster so we can expect it to do so in six-seven years,” says Udasi. Moreover, the penetration of most categories of durables has a long way to go before it reaches a saturation point. “So long as per capita income and penetration grow, the consumption theme can be expected to do well,” adds Udasi. Moreover, premiumisation is expected to boost the earnings of companies in this space. The trend of organised players gaining market share at the expense of unorganised ones will only gather pace in the future.

Consumption is one theme where investors can find large companies with quality management, established brands, low leverage and high free cash flows. Stocks of such companies are capable of delivering steady compounding to investors with a horizon of 5-10 years.

New investors should wait for some time. “Valuations have corrected from peak levels but could correct further. Wait until all the negative news has been factored in, and enter when valuations turn more attractive,” says Maheshwari.