In India’s flourishing economy, characterized by a sizzling stock market, consumer stocks are experiencing a surge, albeit with a notable lag behind benchmark Indian stock indexes. Despite the double-digit gains observed in the stock prices of consumer firms selling essential commodities like soap, hair oil, and refrigerators, they still fall short of benchmark indexes, underscoring underlying challenges in the consumer sector amid low income growth and volatile inflation.
The macroeconomic landscape reflects this disparity. Despite a projected 7.6% expansion in Asia’s third-largest economy for the fiscal year ending this month, private consumption, a significant contributor to economic growth, is anticipated to grow at a mere 3% – its slowest pace in two decades, excluding the pandemic years.
The gap between the affluent and the middle-class has widened, with wealth concentrated in the hands of the top 1% of the population reaching its highest level in six decades, according to the World Inequality Lab.
Vineet Arora, managing director at NAV Capital, emphasizes a shift in household income towards the higher middle and upper classes as a driving force behind the growth in the premium segment. This premium segment encompasses companies specializing in luxury cars, high-end electronics, and luxury goods like watches and jewelry, all witnessing robust business activity and soaring share prices. Notably, Tata group-owned Titan Company has seen its share price surge by 44.3% over the past 12 months, while luxury watch retailer Ethos has witnessed a remarkable gain of 162%.
In stark contrast, the Nifty FMCG index, which tracks fast-moving consumer goods firms, has only risen by 18% over the same period, significantly trailing behind the benchmark Nifty 50, which has soared by 30% and is nearing record highs.
According to four out of five fund managers surveyed by Reuters, this relative underperformance of consumer stocks is expected to persist for another two to three quarters until economic growth broadens.
“While the premium segment offers some growth potential, a broader sector revival relies on improved rural demand and government initiatives,” suggests Arora.
Sonam Udasi, senior fund manager at Tata Asset Management, notes that consumption in segments catering to groups with weak income growth has been subdued. Market research firm Kantar reports that out of 90 FMCG categories tracked, half either witnessed a decline or no change in consumption in 2023.
Hindustan Unilever (HUL), the Indian arm of UK’s Unilever, exemplifies these challenges, with a mere 0.6% increase in quarterly profit in October-December, accompanied by a decline in sales amidst intensifying competition and sluggish demand in rural areas. The stock’s performance reflects these struggles, emerging as one of the worst performers in both the benchmark Nifty 50 index and the consumer index, declining by 8.4% over the past 12 months.