Consumption-oriented stocks are leading the charge on Dalal Street, with the government shifting its focus back to consumer demand to spur economic growth. In the last one year, stocks from the consumer and retail lending space have accounted for 93 percent of all the market capitalization gains for the listed companies.
The combined market cap of the top 55 consumer stocks in our sample was up Rs 1.63 trillion, retail lenders saw their market cap rise by Rs 1.3 trillion, and the total market cap was up by Rs 3.15 trillion.
The top stocks from sectors such as fast-moving consumer goods (FMCG), passenger cars, two-wheelers, consumer durables, fashion, retail and fast-food restaurants now account for a record 27 per cent of the market cap of all non-financial and non-oil and gas firms in the country, up from 21.5 per cent in FY14 and 9.3 per cent in FY08.
Including retail bank and non-bank lenders, the consumer sector accounts for 35 percent of the combined market cap of all listed companies, up from 25.4 percent at the end of FY14 and 12.2 percent in March 2008.
Analysts attribute this to a combination of higher fiscal spending boosting consumer demand and a lack of corporate capex in the economy. “Consumption is the only sector in the economy that continues to grow while investment remains flat. The latest interim Budget has further skewed the balance by giving cash handouts to farmers and tax breaks to the middle class while simultaneously cutting capital expenditure,” says G Chokkalingam, founder & MD, Equinomics Research & Advisory Services.
The 55 consumer goods companies in Business Standard’s sample had a combined market capitalization of Rs 23.8 trillion at the end of trading on the Budget day (February 1, 2019), against Rs 22.1 trillion at the end of March 2018 and Rs 10.5 trillion at the end of March 2014.
Hindustan Unilever is now the most valuable consumer goods company in the country with a market capitalization of nearly 4 trillion, up 36 percent since March 2018, followed by ITC (Rs 3.42 trillion) and Maruti Suzuki (Rs 2.2 trillion).
The biggest gains in market capitalization, however, have been reported by mid-size consumer companies such as Bata (up 57 percent since March last year), Havells India (up 52 percent), and Nestle India (up 48 percent) during the period.
Consumer stocks continue to rally despite a slowdown in their earnings growth and decline in their earnings share in the total universe.
For example, consumer companies accounted for 16.3 percent of all corporate earnings (ex-financials and energy) during the 12 months ending December 2018 and down from their 16.8 percent share in earnings during the fiscal year ending March 2018.
The result has been a steady expansion of the valuation multiple of consumers stocks in recent years. A typical consumer stock in our sample is now trading at 38 times its earnings in trailing 12 months, marginally down from 38.1x at the end of March last year, but nearly double the earnings multiple for non-consumer stocks. A typical non-consumer stock is trading around 20 times its trailing earnings, the lowest in the last six years.
“There is at least earnings visibility in the consumer sector against earnings contraction in most of the non-financial and non-technology space. This has led to a situation where most of the institutional money is chasing a few top stocks in consumer-related sectors,” says Dhananjay Sinha, head institutional equity Emkay Global Financial Services.
He expects the trend to continue in the near term given poor earnings projections for most of the companies in the non-consumer space.
Others see it as an extreme polarisation in the equity market not seen in at least the last two decades. “The market is now extremely polarised with the top 15 stocks accounting for most of the gains in the market capitalization and benchmark indices. The funnel has never been so narrow in at least last 25 years,” says Chokkalingam.
This, Chokkalingam says, could make the market highly vulnerable if earnings growth turns negative in the consumer sector or the liquidity situation worsens.―Business Standard