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Consumption Theme: Are you taking a big bite? - Outside View by PersonalFN

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Consumption Theme: Are you taking a big bite?
Jan 6, 2012

The year gone by has been a difficult year for investors as deteriorating macroeconomic conditions have adversely affected the investorsRs sentiment. While policy makers in Europe struggled to find a concrete solution to the sovereign debt crisis, unemployment rate is still quite in in some of Euro nations such as Spain and Greece. Similarly, even though huge monetary stimulus packages have been doled out in the U.S., it has not gone too well in accelerating the economic growth rate in the U.S. either. But a sigh of relief for them is that at least the rate of unemployment has mellowed to 8.6% In November 2011. This has negatively affected the demand for consumersRs goods in the developed nations - especially the Euro zone.

Export oriented nations such as Germany and Netherlands, which have huge capital account surpluses, are now concerned about the possible slump in sales due to slowing demand in other countries. Although to a lesser extent, demand in US too has been impacted. However everything is not lost; consumer confidence in emerging markets and especially in India has been high. Despite the hawkish monetary policy stance adopted by Reserve Bank Of India (RBI), the year gone by, saw the highest ever monthly care sales figures and demand for luxury goods such as branded clothing and jewellery has been vibrant. And interestingly to battle the slowdown in the west, global MNCs are increasingly focusing on emerging markets these days.

As a part of this strategy many global brands are busy now a day in expanding their product portfolios in India. One of Europe's largest carmakers, Volkswagen, has planned a launch of Porsche sports car - Marquee, in India this year. Similarly, Marriott International, a leading US based lodging company, is planning to set up 100 Hotels in India by the year 2015. While the international consumer brands such as these are focusing on Indian markets, Indian companies are not behind in the race of getting the incremental share of consumersRs wallet. Indian watchmaker Titan for example, which also owns the India's leading jewellery brand Tanishq, has chalked out aggressive expansion plans for the current fiscal.

Consumption story in India.....

India has the second highest population in the world and has been world's one of youngest nations. In the past two decades India has witnessed a drastic fall in the number of people living below poverty line. As per the World Bank estimates, 44.5 % of the total population was living below the poverty line in 1983 which dropped significantly to 27.5% in 2005. Similarly, middle class population has witnessed a steady rise. Real household disposable income has more than doubled since 1985 as per the findings of National Council of Applied Economic Research (NCAER), India. Until the end of year 2000; food, beverages, tobacco and apparel together constituted more than a half of private household expenditure in India as per the estimates of Central Statistical Organisation (1998). However with emergence of young brigade of urban consumers following ritzy lifestyle has propelled the demand for consumer non-durable goods, personal care products and other luxury goods and services.

Furthermore, Mckinsey Global Institute, a reputed global management consulting company, estimates that India's middle class will grow to 583 million by 2025, a manifold jump over the current size. With a rapid GDP growth witnessed in last 7-8 years subject to an occasional blip, India has already seen a massive consumption boom in some sectors such as mobile telephony. The table given below reveals that India has been one of the fastest growing telecom markets in the world.

Cellphone penetration in India (Number of subscribers per 100 people)
Country 2006 2007 2008 2009 2010 CAGR*
United States 77 83 86 89 90 3.17%
United Kingdom 116 121 125 130 130 2.31%
China 35 42 48 56 64 12.83%
Brazil 53 64 79 90 104 14.43%
India 15 21 30 45 64 33.67%
(* Compounded Annual growth rate over last five years)
(Source: World Bank, PersonalFN Research)

Consumption: From an Investment perspective..

Consumption story in India, which is mainly driven by the demand from burgeoning middle class, is a popular investment theme among investors around the globe. As consumer behaviour has undergone attention drawing changes post liberalisation; companies that are directly or indirectly linked to the discretionary consumer spending have been in vogue. These companies are showing strength even when the broader stock markets have faltered especially during last calendar year. In fact, some companies that were listed in recent years have managed to beat the broader indices by a substantial margin. For Example, Jubilant Foodworks, which runs the Domino's Pizza chain in India or Lovable Lingerie, a Women's innerwear manufacturer, have been investorsRs favourite throughout 2011. FMCG companies such as HUL and Marico and business conglomerate ITC which mainly operates in FMCG space, have also outperformed the broader markets.

Strong show put up by the consumption stocks
Company 1 Year Returns (Absolute)
Lovable Lingerie* 51.2%
Hindustan Unilever 30.6%
Jubilant Foodworks 20.7%
Marico 20.6%
ITC 15.4%
Nestle India 9.9%
GSK Consumer Healthcare 9.9%
Britannia Industries 9.3%
S&P CNX NIFTY -24.6%
(*Returns since the date of listing i.e. March 24-2011)
(Source: NSE India: PersonalFN Research; Returns are absolute and point to point
for the stock prices as on December 31st 2010 and December 30th 2011)

More to the story ...

However, it would be imprudent to judge the strength of a theme or a sector based on 1 year returns and that too after taking into account the performance of just a few companies. It would be wiser to compare the performance of a basket of stocks belonging to the consumption theme with that of a broader index such as S&P CNX Nifty for a longer time period.

The CNX Consumption Index represents the companies belonging to the domestic consumption theme and includes sectors such as consumer non-durables, healthcare, auto, telecom services, pharmaceuticals, hotels, media & entertainment, etc. and comprises of 30 companies listed on the National Stock Exchange (NSE).

CNX Consumption vs. S&P CNX Nifty
(Base: '100)
(Source: NSE India: PersonalFN Research)

Chart given above depicts that Rs 100 invested in CNX Consumption index as on December 29, 2006 would have appreciated to Rs 128 as on December 30, 2011, while an equivalent investment in S&P CNX Nifty would have yielded Rs 117 over the same timeframe. Interestingly, the CNX Consumption Index has also revealed stronger resilience vis-a-vis the S&P CNX NIFTY during the downturn of 2008-09 and has also sailed well last year despite the turbulence in the Indian equity market caused by the Euro zone debt-overhang situation.

Similarly, even mutual funds following the consumption theme have outperformed the broader index - S&P CNX Nifty over a 3 year and 5 year time frame.

How the mutual funds following the consumption theme have fared
Scheme Name 6 Months 1 Year 3 Years 5 Years Std.Dev Sharpe Ratio
Birla SL Buy India (G) -18.6 -23.3 22.1 4.8 7.49 0.21
Birla SL India GenNext (G) -15.1 -13.6 20.2 7.3 6.54 0.21
UTI India LifeStyle (G) -14.1 -13.0 19.8 - 6.15 0.21
Canara Robeco F.O.R.C.E (G) -20.2 -21.6 - - 4.86 0.02
Mirae Asset India-China Consumption (G) -6.4 - - - 3.18 -0.23
S&P CNX NIFTY -18.1 -24.2 15.8 3.1 9.01 -0.07
(NAV data is as on December 30, 2011.Standard Deviation and Sharpe ratio is calculated over a 3-Yr period.
Risk-free rate is assumed to be 6.37%)
(Source: ACE MF, PersonalFN Research)

The table above demonstrates that all the funds with a bias to invest in the consumption theme, have outpaced the S&P CNX Nifty across time frames. Furthermore, they have been less volatile than the S&P CNX Nifty as revealed by the lower standard deviation and, by and large have generated superior risk adjusted returns as the sharp ratio is higher than that of S&P CNX Nifty in all cases, except Mirae Asset India-China Consumption Fund. It is noteworthy that these funds mainly seek to benefit from the investment in companies which are expected to reap the benefits of growing consumerism among Urban and Rural population.

Other side of the coin...

The consumption story in India is supported by robust fundamentals; however there are some shortcomings of the theme. India has a large unorganized market and many companies which are still unlisted have been the major beneficiaries of the consumption boom in India. This limits the pool of companies available for investment. For example, Hyundai's Santro has become a household name in India, but Hyundai still remains unlisted for Indian investors.

India is now the third largest outbound travel market in Asia Pacific region according to the report published by World Travel & Tourism Council (WTTC). But interestingly, Kesari, which is a preferred travel company in India for the domestic travellers, still remains a private limited company. Similarly, youngsters are buying swanky androids and Blackberry which have emerged and become popular smart phones in India. However, equities of companies launching them still remain inaccessible to domestic investors. Furthermore, changing consumer preferences and thinning line between the urban and the rural spender is making the tasks of companies difficult. Intensified competition and fluctuating raw material prices also add to the worries of these companies.

End Note:

Investment in a particular sector or a theme remains risky whether it is done directly in stocks or through a mutual fund route. A sector or a theme can hit a rough patch due to various micro and the macroeconomic adversities. Moreover, a thematic fund restrict a fund manager to invest in companies only within that theme, which thus signal high risk in case of adversities faced by the theme.

On the other hand opportunities funds allow you to take exposure not one, but various promising themes, thereby facilitating the flexibility to invest across the spectrum of sectors / themes and also various market capitalisation (i.e. large cap, mid cap and small cap) within those sectors / themes. This thus make them less vulnerable to the risk of sector concentration, and power your investments with promising investment opportunities which are emerging. In fact these traits of opportunities funds have helped them in beating the performance of even a broader index - such as S&P Nifty thereby help investors to create wealth over the long-term.

Hence, along with pros which one sector / theme offers one also needs to aware of the cons before parking your hard earned money.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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