Investors focus on consumption stocks as the sector registers growth

Investors, wary of the impact of supply bottlenecks induced by Covid and the relentless rise in raw material prices in the wake of the Russia-Ukraine conflict, have lately focused on a section of consumption stocks. This has been quite evident in the current quarter, which marked the arrival of the ongoing festive season. 

While input costs are still at very high levels, select pockets of the consumption sector have already recorded a marked escalation in revenues. The sector as a whole, as some quarters believe, is readying for firmer trends to emerge.

Some quarters are said to be specifically looking for value-buying in medium-sized consumption stocks. This, according to stock brokers, indicates bargain hunting by investors who are clearly seeking fresh opportunities, at least in the medium term. 

These sections are believed to have been spurred by recent developments in the consumption space. Indeed, select segments have already witnessed a series of product consolidations and price corrections. The presence of dynamic brands, a number of which have fortified their positions, will spur growth in the days ahead, it is felt. New and emerging consumption businesses will particularly reflect the change.

The market, broking analysts maintain, will witness the arrival of newer brands in the food and edibles space. An review of various reports reveal positive developments in at least three distinct spaces:

●      Milk-based products and sundry confectionary items

●      Fruit-based flavoured drinks (non-alcoholic beverages)

●      Products based on soya and soya-extracts

In the non-food segment, brokers have identified newer possibilities in areas like cosmetics, paints, bathroom hygiene products and home decoratives. At another level, consumer services businesses are also likely to gather steam in the days ahead, it is felt. Many of these will be digitally enabled. All of these will be driven by robust consumption patterns. The latter will be seen in both rural and urban markets.

Despite all the ebullience, dissenting voices are being heard too. These essentially stem from fears expressed in the wake of geopolitical conflicts, leading to even higher inflation. Dissidents in particular underscore the latest stands adopted by banking regulators around the world. The spectre of inflation, which has spurred hawkish regulatory strategies, may well spook consumption trends in future, at least in the short term.

Consumption businesses will pass on the impact of higher input costs to their customers. This already happened to a marked extent – and prices of many commonly available consumables have grossly increased. The largest players in the domain, including Hindustan Unilever, Nestle, ITC, Tata Consumer, Britannia, Godrej and Marico, have corrected their product pricing styles. 

Inflation around the world will impact discretionary spending everywhere, it is felt. In a country like India, the trend will be particularly evident. Already for consumption businesses across the board, the prices of vegetable oil, wheat and other key ingredients have escalated. This has threatened to depress gross margins.

Only the patient investor who seeks value, therefore, will appreciate the quirky scenario. Beyond the more established players (especially those engaged in food and beverages) are a host of smaller enterprises. Some of these are engaged in electronics, watches, apparel and footwear The market anticipates a round of value-buying in such segments.

(Nilanjan Dey is Director, Wishlist Capital and author of No Room For Less. The views expressed in the column are of the writer. He can be reached on nildey@yahoo.com)