Lower commodity prices have eased margin crunch for consumer companies. Indicators of improving investor sentiment in these companies are relative changes in the sector weight composition of the Nifty 50 index.
An analysis by Motilal Oswal Financial Services Ltd showed that the consumer sector weightage rose 180 basis points (bps) to 11.2% in the first nine months of calendar year 2022. One basis point is 0.01%. The current scenario of improving systemic credit growth and rising interest rates works in favor of banks. Consequently, the weightage of private banks increased by 140 bps to 23.3% in the period under consideration. On the other hand, fears of a global recession have affected the performance of technology (IT) stocks. According to the Motilal Oswal report, the weightage of the sector has fallen sharply by 530 bps to 13.8%.
A key factor driving the higher weighting of the consumer sector is the strong performance of ITC Ltd, whose shares have gained 52%. Earlier the stock had declined. There was no adverse tax hike in this year’s Union Budget also.
The consumer sector is a defensive bet. Deepak Jasani, Head of Retail Research, HDFC Securities Ltd said, “In case of market risk or panic, investors flock to this segment, which has happened recently.”
The prices of key inputs like crude oil and palm oil have softened from their peak and this is a matter of relief for consumer companies. Also, increasing the prices will also help. The benefits of these developments will be reflected in earnings from Q3FY23.
The demand environment is also improving. “Demand trends remain weak in July-August, with good momentum seen in September, leading to many expected price/volume gains,” analysts at Edelweiss Securities said in a Q2FY23 preview report on Consumer Staples on October 4.
That said, demand in rural markets could be under pressure due to high inflation.
Meanwhile, the Nifty FMCG index is up nearly 18% so far in CY22, while the Nifty 50 index is down 0.5%. Valuation of consumer stocks isn’t cheap at all, Jasani said. According to Bloomberg, the shares of Hindustan Unilever Limited and Britannia Industries Limited trade at 54.5 times and 44.2 times FY24 estimated earnings, respectively.
“In the slightly longer term, the entry of Adani and Reliance risks meaningful expansion in valuations. For now, the consumer story is more about earnings growth rather than valuation,” Jasani said.
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