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Top 5 Consumption Stocks to Add to Your Watchlist

Apr 11, 2022

Top 5 Consumption Stocks to Add to Your Watchlist

The year 2021 ended on a good note for the markets and investors. Fintech, EVs, and digital sectors boomed, and the story looks even more promising for them in 2022.

While these new themes hogged the limelight, a sector that was overlooked was the consumption sector.

Let's be rely on consumer durable goods every day, be it daily essentials such as food and beverages, or household and home care products such as paper goods, alcohol, tobacco, and cosmetics.

The future is bright for these companies. Expected growth is pegged at a of 12% CAGR over the next 5 years for consumer durables.

After all, India is a burgeoning middle-class economy. The middle class is expected to drive 75% of the consumer spending by 2030.

Needless to say, a rising middle class with more disposable income and a shift towards incremental spending are key factors in the steady growth of FMCG in India.

This is probably why despite the restrictions imposed due to Covid-19, and rising costs of materials, trade in 2022 has rebounded to near normalcy for the consumer goods industry.

So, why not participate in this new growth story?

Let's look at the top 5 consumption stocks in India which should be on your watchlist in 2022.

#1 Orient Electric

The journey of Orient Electric has been an interesting one. A part of the CK Birla Group, it started out as Orient Fans. It was inducted in the group in 1954 as a division of the Orient Paper and Industries (OPIL).

Orient Electric (OEL) became an entity of its own in March 2017 when the company demerged its electric business from OPIL. This was to increase focus, accountability, and shareholder value for both businesses.

Since 2017, OEL has consolidated its position as one of the leading players in the consumer electric goods segment in India. With around 18-20% market share in the Rs 80 bn fan industry in India, Orient is also the largest exporter with a 60% share of the export pie.

The company has grown in leaps and bounds over the years. Right from patenting its revolutionary PSPO technology in 1990, it has diversified its product portfolio by venturing into lighting, home appliances and switchgear businesses.

However, OEL still derives the bulk of its revenue from the fan business.

Orient has smartly kept up with the rising demands of the middle class in India. Not only has it forayed into a range of energy efficient products but has also entered into an exclusive strategic alliance with Italy's De'longhi group to sell its premium international brands in India.

The partnership enabled OEL to expand its appliances portfolio in the premium segment. This led to doubling its sales from Rs 93 m in 2020 to Rs 181.7 m in the fiscal year 2021.

Today, the company is practically debt free and has a healthy interest coverage ratio of 8.81. With efficient cash flow management and an improvement in capital structure, the net profit was Rs 380 m in 2021.

So, if you are looking to add a company to your watchlist with a history of profitable growth, then Orient Electric with an average 23.3% profit growth should certainly be your top choice.

#2 Marico

Marico was incorporated in 1988 as Marico Foods. It was later rechristened as Marico Industries in October 1989. The company has popular brands like Parachute Coconut Oil and Saffola in its kitty.

Today, it's one of India's largest consumer goods companies operating in the global beauty and wellness space with a strategic presence across key international locations.

In its 30 years of operations, Marico has firmly established itself as a market leader offering over 90% of daily use items as part of its product line.

Standouts among them have been the Parachute and Saffola. The company has captured a 61% volume share in the hair oils category and 81% volume market share in the super premium refined edible oil category in 2021.

With strategic acquisitions of 55% in Zed Lifestyle in 2020, the parent company of start-up brand Beardo, and its strategic investment in the brand Just Herbs, Marico confirmed its commitment to expanding its product portfolio.

Overseas markets contribute a 23% share of group revenues. Sales in financial year 2021 remained steady despite the disruptions of the pandemic. This is largely due to its market position in the core hair-care segments in Bangladesh, the Middle East, and North Africa.

Revenue growth for Marico in financial year 2022 is likely to be supported by the recovery in urban demand and sustained performance across its core portfolios. The financial position of the company is healthy with surplus cash of Rs 13 bn.

Marico has been maintaining a healthy ROCE of 39.3% over the past 3 years. It has minimised its debt to equity ratio to almost nil. With strong distribution across domestic and international markets, Marico recorded net sales of Rs 18.65 bn in December 2021.

Despite low revenue growth of 7-% for the past 3 years, the company has a healthy liquidity position with a current ratio of 2.11.

Historically, Marico has done well for its shareholders with a 23% CAGR since listing in 1996.

Therefore, if you are looking to diversify - into the beauty and wellness space, then Marico is a strong contender for the best consumptions stock to watch out for in 2022.

#3 Polycab India

The worldwide wires and cables market is estimated to reach US$231.9 bn in 2027. The prospect of this growth is also supported by global drivers for the industry. These include rising urbanisation, industrialisation, and growing infrastructure needs.

Polycab India is the country's numero-uno integrated manufacturer and supplier of state-of-the-art wires and cables. It has a 20%-22% share in the organised segment.

Initially operating as part of the manufacturing unit from the Halol plant since 1964, the business was formally incorporated in 1996.

Since then, Polycab has forayed into the switches segment and diversified further into fans and LED lighting segment setting up manufacturing units at Nashik and Roorkee.

Wires and cables still dominate sales contribution by as much as 81% whereas fast moving electrical goods contribute around 11.5% to the overall revenue.

Polycab's strong brand presence and market position are supported by its pan India dealer-distributor network of over 4,000 entities.

Moreover, its strategic presence in engineering, procurement and construction (EPC) backs its core business. The confluence of both paves the way for the company's long term growth.

With an expansive manufacturing presence in India, global operations, and a bouquet of best-in-class products, the company recorded revenues of Rs 89,265 m and a PAT -of Rs 8,859 m in 2021.

Even though Polycab has shown poor revenue growth of 8.9-% for the past 3 years, the company today is virtually debt free. It decreased its debt by Rs 536.9 m in 2021.

Maintaining a healthy ROCE of 27.1% over the past 3 years, the financial risk profile for Polycab India is expected to remain fairly healthy.

Higher demand from export markets, conducive central and state government initiatives, increasing cash accruals, and strong liquidity puts Polycab India at number three on our list of top consumption stocks in 2022.

#4 Hindustan Unilever

No prizes for guessing the next stock on our list. You probably thought of Hindustan Unilever when you clicked on this article.

One of India's largest FMCG companies, Hindustan Unilever (HUL) has 85 years of heritage. It is a subsidiary of Unilever Plc that holds a 62% stake in the company.

With a product portfolio spanning daily use essentials like personal care, fabric care, skincare, haircare, oral care, beverages, dairy-based products and water purifiers, HUL is a part of everyday life of millions of consumers in India and abroad.

14 of its brands like Lakme and Dove today generate over Rs 10 bn in revenue and have been featured as part of 'Top 100 Brands in India' and 'Most Trusted Brands 2020'.

HUL's strong 50+ brands generated net sales of Rs 460 bn in 2021. From a revenue share perspective, beauty and personal care products contributed 44%, the home care category contributed 34%, and foods and refreshments came in with 19% of the total revenue.

The merger with GlaxoSmithKline (GSK) Consumer Healthcare with assets like Horlicks, Maltova, Boost and Viva further strengthened HUL's market position in the food and refreshment segment. It also contributed to medium term revenue diversification.

The company shifted its focus to a purpose-led, future-fit business model. This was designed to drive better performance delivering competitive, consistent, responsible and profitable growth for HUL. With an enviable debt free balance sheet, the company's sales have grown at a CAGR of 7.8% and the PAT has grown at a CAGR of 14.4% over the last 5 years.

HUL's seasoned leadership managed the challenges of Covid-19 and it was able to sustain strong cash generation. With high liquidity, HUL announced an interim dividend payout of Rs 15 per share for 2022.

HUL has been maintaining an average operating margin of 20.3% in the last 5 years with a healthy interest coverage ratio of 98.1-. -A 18.1% profit growth in 2021 makes HUL a consumption stock that you must look at this year.

#5 Nestle India

Nestle India has a 108-year long association with India. It's one of India's largest FMCG players. Nestle S.A is the parent company and holds a 62.7% stake in the Indian business.

The company is a market leader in the food and refreshments segment with a standout brand like Maggi with several sub-brands under this core umbrella. Within its portfolio, Nestle has captured the market leader position for 85% of its products.

Despite increasing competition and the Maggi fiasco in 2015, the company continues to maintain its leadership position across several foods and refreshment categories.

Nestle India recorded - net sales of Rs 1,463.37 bn in 2021 with multiple product lines.

46% of its revenue generation comes from dairy products and weaning foods, 31.8% from prepared dishes and cooking aids, 14.8% from chocolates and confectionery and 12% from beverages.

Despite disruptions in the supply chain as a result of the pandemic, the domestic business continued to flourish with double digit momentum. The overall revenue for the company grew by 10% YoY.

A significant contributor to this growth rate is Nestle India's access to its parent company's proprietary technology and strong research and development capabilities. This is has enabled Nestle India to keep innovating to meet consumer needs.

Moreover, the company was able to launch 80 new products in the last 5 years which has added to the revenues.

Nestle India has a robust export business where 46% of its sales is generated from the American geographies, 29% from Europe, MENA and 26% from Asia, Oceania, and the sub-Sahara region.

The financial risk profile for the company is robust. It is supported by strong operating cash flow and a comfortable capital structure. The company has been maintaining a healthy ROCE of 131.47% over the past 3 years and is almost debt free.

The company's PAT has grown at a CAGR of 13.6% in the last 5 years. Clearly, all these factors make Nestle the last consumption stock that should be on your 2022 watchlist.

Why India's growth story relies heavily on the consumption theme...

Even though consumption stocks may not be on your radar right now, you have to agree that these stocks offer consistent returns over the years. More so in volatile periods...

These companies usually have a good track record of sales, have an established market presence, and offer hefty dividends.

Even in difficult times, they are able to post consistent sales and show growth.

In a volatile market, these stocks give your portfolio the much-needed depth and balance.

The above list of stocks was obtained with the help of Equitymaster's Stock Screener. Don't go by this list alone. Do your own research and filter out companies that are aligned with your investment portfolio.

Be sure to check if the company has a good and consistent track record of reporting profits and paying consistent dividends over the last 5 years. Last but not least, make sure you invest in a company that has minimal debt and robust cash flow. With a rising population, consumption seems like the best theme to participate in the India growth story.

Just like penny stocks, the name of the game is to wait it out because consumption stocks also have the potential to deliver high returns in the long term.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

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