Consumption play gets tempting, but stay selective
Nov 25 2012 , New Delhi
Early reports suggest a 30 per cent to 40 per cent year-on-year jump in festival sales for FMCG and consumer durables firms. Domestic car sales jumped 23.09 per cent to 1.72 lakh units in October, which was the highest growth rate in nearly two years. These numbers came as a morale booster for these businesses after a prolonged sluggishness in the economy.
But does this mark a revival in consumption, and can investors expect things to improve from here on?
Industry watchers say the festive spending spree was only one-off and things will remain sluggish as long as the inflationary pressure and the high interest rates continue. Stock analysts say the spurt in sales is unlikely to make any significant impact on December quarter bottom lines of these firms, particularly those from the auto and consumer durables segments, as the boom was driven by heavy discounts and other doleouts and companies in these segments have already been facing margin pressures, though input costs have begun to ease from the September quarter.
In the September quarter, auto firms reported a 4 per cent quarter-on-quarter drop in sales while consumer goods firms saw sales grow marginally at 4.4 per cent QoQ. All auto companies other than M&M (reported 22 per cent PAT growth) reported a drop in earnings. The consumer discretionary sector was one of the weakest performers during the quarter, clocking just about 1 per cent revenue growth and negative margin expansion. Consumer staples firms, however, managed to grow their margins by about 80 basis points year-on-year. Interest costs to sales remained at a 10-year high.
“The festival season spending will provide a one-time boost to sales volumes of the FMCG companies. However, the real shift in buying trend of consumers will happen only when the interest rate cycle starts reversing,” says Sudip Bandyopdhyay, MD of Destimony Securities.
According to Bandyopadhyay, FMCG stocks, which are richly valued now, will become less attractive compared with the interest rate-sensitive sectors and other emerging growth sectors. “Uncertain economic environment in 2012 led to the extraordinary demand in growth stocks irrespective of their values. Value buying had gone out of fashion. The trend is continuing even now. We believe value buying will come back with the expected reversal of the interest rate cycle in 2013,” he said.
Such a trend appears to have beg-un already. After the September quarter earnings, Maruti Suzuki has seen an earning upgrade by 3.4 per cent for FY13 and by 3.6 per cent for FY14, Bajaj Auto 7 per cent and 2.4 per cent, while Jubilant Foodworks has faced a downgrade by 5.4 per cent and 5.2 per cent, respectively. HUL has neither seen any upgrade nor downgrade.
Some analysts say it will take longer for consumption to pick up after the long onslaught of high inflation on the consumer pocket. “While growth trends of the economy appear to be stabilising, consumption as well as investment growth remain in a low range,” observes Morgan Stanley economist Chetan Ahya. “Within the consumption segment, discretionary spending improved in October, but this appears to be have been largely due to pre-Diwali sales,” he said.
According to Nitin Mathur of Espírito Santo Securities, price cuts and higher promotional spends are likely to become a trend for consumer durable firms, against the backdrop of a weak consumer environment and poor volume growth.
While the slump in sales seems to have bottomed out for the auto industry and an imminent softening of interest rates puts them in a sweet spot, consumer durables firms would also gain from a fall in interest rates and pent-up demand.
The FMCG stocks are under watch after having run up sharply in the defensive buying spree.
Gaurav Dua, head of research at Sharekhan, pointed out that FMCG companies are now trading at premium valuations, as they are being favoured in an uncertain market environment.But the fact that these companies have managed to put up a good show in the September quarter and raw material costs have fallen over the past few months will protect them on the downside.
“We remain very selective while picking stocks in the FMCG space. We maintain ITC as our top pick in the large-cap FMCG space and GCPL and GSK Consumer in the mid-cap space. We like these stocks on account of decent earnings visibility and strong upside potential from present levels,” he said.
Also, given the global uncertainty and the outlook for a slow revival in the domestic economy, equity investors will continue to bet on FMCG stocks as possible hedges, Amar Ambani, head of research at IIFL, told FC Invest last week.
In a recent analysis of earnings growth and relative stock trends, Morgan Stanley analysts Ridham Desai, Sheela Rathi, Amruta Pabalkar and Utkarsh Khandelwal pointed put that the performance of consumer staple stocks has been backed by earnings upgrades for the 12 months running.
Among the stocks where relative earnings have been raised but the stock have underperformed were many FMCG names like ITC, HUL and Dabur. “We can argue that earnings will catch up with share prices, but the opposite cannot be ruled out. Either way, these represent opportunities for investors, in our view,” they argued. zz
(With inputs from Amit Mudgill)