Hold consumption-related stocks for long term

Analysts expect earnings to become increasingly relevant given that the stocks have rallied on positive sentiment and the gush of liquidity. Macro factors, they suggest, have already led to a large re-rating in most counters

The hope of a favourable monsoon which could boost rural income, keep inflation under check, nudge the Reserve Bank of India (RBI) to lower interest rates and induce spending, and the excess cash with government employees thanks to the 7th Pay Commission recommendations have seen investors flock to consumption-related stocks since March 2016 when the overall market sentiment started improving.

While the Nifty India Consumption index - a gauge of the behaviour and performance of a diversified portfolio of companies representing the domestic consumption sector - has performed in line with the Nifty50 index, rising nearly 26 per cent since March 2016, a lot of stocks within the consumption space have gained much more.

Among individual stocks, Zee Entertainment, Asian Paints, Page Industries, Hero MotoCorp, ITC, Britannia, and Marico have rallied 25-50 per cent since March. Maruti Suzuki, Sun TV Network and Havells India have surged 50-70 per cent during this period.

So, does the rally in consumption-related stocks have more steam left, and how should you play this theme given the rise?

Going ahead, analysts expect earnings to become increasingly relevant given that the stocks have rallied on positive sentiment and the gush of liquidity. Macro factors, they suggest, have already led to a large re-rating in most counters.

“We expect the market’s focus to shift increasingly to earnings and fundamentals as the scope for re-rating of multiples is quite limited. Domestic positive events such as 7th Pay Commission’s implementation, good monsoons and decline in interest rates have partly played out but are largely priced in,” says Sanjeev Prasad, senior executive director and co-head at Kotak Institutional Equities, in a co-authored report with Sunita Baldawa.

Despite the run-up, analysts remain bullish on these stocks and suggest investors continue to stay put at least for the next two-three years in stocks of fundamentally sound companies that have earnings visibility.

“Consumption is an on-going theme in India with a huge customer base. The hope of a rate cut and 7th Pay Commission recommendations have just accelerated this theme. Having said that, one cannot paint the entire consumption theme with one brush. We are in a phenomenal bull market, and investors need to be careful where they invest. I believe these stocks can be at much higher levels in the coming years,” said Jagannadham Thunuguntla, head of fundamental research at Karvy.

A good monsoon and improved sowing could result in better harvest and increased rural income going ahead, say analysts. With the implementation of the 7th Pay Commission recommendations, they expect consumer durables, two-wheelers, passenger cars, home improvement companies - including paints, tiles, plywood etc - to witness an increased off-take in the second half of FY17.

On a relative basis, analysts at Prabhudas Lilladher expect the consumer goods sector to outperform going ahead.

“We see stocks Britannia Industries, Pidilite Industries, Hindustan Unilever and paint companies as stocks that have a strong growth momentum over the next few years. These are companies with free cash-flow, and the stocks need to be looked from a three-year perspective rather than the next 12 months,” says R Sreesankar, co-head for institutional equities at Prabhudas Lilladher.

Photograph: Shailesh Andrade/Reuters