A Wealthy Rift

As India’s economy bursts at the seams, a chasm widens between the affluent and the middle-class, starkly evident in the lackluster performance of consumer stocks amidst the fervent market rally.

While consumer companies specializing in staples like soap, hair oil, and refrigerators witness modest upticks, they continue to trail behind key Indian stock indices. This discrepancy is fueled by sluggish income growth and erratic inflation, constraining the demand for everyday essentials, even as luxury items fly off the shelves.

A Macro Mismatch

Indicators suggest a telling tale. Despite projections of a robust 7.6% surge in Asia’s third-largest economy by the end of this fiscal year, private consumption – a primary driver comprising 60% of economic expansion – is slated to expand at a tepid 3%, marking its slowest pace in two decades, barring the tumult of the COVID-19 era.

The soaring wealth inequality exacerbates the scenario, with the top 1% holding the largest share of riches in six decades within the nation, as noted by the World Inequality Lab.

“A significant shift in household income from the lower to upper middle class and from the affluent to the elite segment is propelling growth in the premium domain,” stated Vineet Arora, the managing director of Singapore’s NAV Capital, overseeing a hefty $95.95 million in the Global Opportunities Fund.

A Laggard Market

Contrastingly, the Nifty FMCG, the barometer for fast-moving consumer goods (FMCG) entities, has seen an 18% surge over the past year. However, this pales in comparison to the Nifty 50’s remarkable 30% ascent, bringing it close to historic heights.

“While high-end categories hold allure, the broader sector’s revival hinges on revved-up rural demand and governmental interventions,” Arora emphasized.

The Cost Conundrum

Meet Manjunath, toiling at a dry-cleaning establishment in Marathahalli, Bengaluru, striving to sustain a family of five on a meager monthly income of $360 (30,000 Indian rupees). As prices soar for essentials like veggies and the cherished ‘surti kolam’ rice, he’s compelled to tighten his purse strings.

Conversely, Ganesh Kumar, a white-collar worker at a tech giant in Chennai drawing $1,440 (120,000 rupees) monthly, finds indulgence within reach, be it in lavish adornments or family getaways.

“Post-COVID and the era of remote work, our expenses have dwindled. Now, it’s about comfort,” Kumar shared.

The Lure of Luxury

In the landscape of consumer durables, 10 out of 15 stocks – including stalwarts like Voltas and Whirlpool – have struggled against benchmark indices this fiscal year. Despite foreign investors offloading $408.2 million from FMCG and consumer durable stocks, overall inflows into the Indian market have surged by a colossal $21.8 billion in the same period.

“The narrative of premiumization is unfolding within the consumer realm,” Nirali Bhansali, an equity fund manager at SAMCO Mutual Fund, observed. While backing Ethos and Titan stocks, Bhansali voiced concerns over their lofty valuations.

The Premium Parade

Trading at a decade-high multiple of 51 times 12-month forward earnings, the FMCG index and consumer durables index at 69 times, depict a buoyant market. Notably, entities like Titan and Ethos command even loftier valuations of 93 and 82 times, respectively.

Anticipating a burgeoning appetite for premium brands in the coming decade with escalating incomes, Abhijit Bhave, Equirus Wealth’s CEO, foresees a sustained uptick in this segment due to evolving consumer preferences and lifestyle shifts.

The Upside of Downside

Despite challenges, companies catering to mass demand exert EBITDA margins hovering at 19%-32%, leveraging moderating commodity costs and efficiency measures. Conversely, premium segment players, like Titan and Ethos, grapple with margin growth in the range of 10%-20% due to gold price volatility.

With a volume growth of 10%-16%, premium enterprises outshine their mass-market counterparts, clocking sub-5% growth rates, as outlined by Aishvarya Dadheech, Fident Asset Management’s Chief Investment Officer.

($1 = 83.3512 Indian rupees)

Private consumption lags India’s GDP growth in fiscal 2024 https://reut.rs/4anplvn

Consumer stocks underperform India’s Nifty 50 in last 12 months https://reut.rs/4a8t1BG

Volume growth trends at < 5% for India’s consumer companies https://reut.rs/3x15K5Y

FPIs offload shares of consumer stocks over last 12 months https://reut.rs/43rGyS2

While India’s stock market sizzles, the consumer sector gets a discount https://reut.rs/3VADuRA

(Reporting by Bharath Rajeswaran; Editing by Vidya Ranganathan and Kim Coghill)

((bharath.rajeswaran@thomsonreuters.com; +91 9769003463;))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.