Bet on the 'Affluent India' theme while picking consumer stocks, suggests this Goldman Sachs analyst

Even in FMCG companies that reported a slowdown in Q2, the premium portion of their portfolios grew in double-digits.

With the September quarter earnings season all wrapped up, the picture on the cards is clear, there's a broad-based slowdown in urban consumption across product categories.

However, in the eye of the storm, the ‘Affluent India’ theme remains buoyant, seeing no pressure despite waning demand from the urban population, suggested Arnab Mitra, India Consumer Analyst, Goldman Sachs. In an interview with Moneycontrol, Mitra discusses the various factors driving the slowdown in urban demand.

While consumption from metros, tier-1, or tier-2 cities has lagged over the past quarter on an aggregate level, if we take a closer look at the data that is emerging, the slowdown is seen in the mass-end of the product offerings, he noted. The top-end consumption remains extremely resilient, causing a large divergence in urban consumption.

“If you look at sectors, such as jewellery, travel, leisure, premium real estate - companies which address real estate construction products - those still remain extremely healthy. There's been no slowdown there. Things remained very robust,” said Arnab Mitra.

Instead, the real slowdown seems to be in mass urban, which is the mid- to low-income urban consumption. Segments such as quick-service restaurants (QSRs), footwear, or some sections of the FMCG offerings fall under this umbrella, he added.

Also Read | Has urban demand slowdown altered the investment outlook for consumption stocks?

Why is mass-end urban consumption lagging?

Mitra points to a slew of reasons causing the lag in demand. First, heavy food inflation has caused consumers to tighten their belts and pinch their pennies.

Over the last four or five years, food inflation in India was under control, hovering in the mid-single digits. However, over the last 10 of the 12 months, the number has been stubbornly over the eight percent mark. Of food inflation, vegetable inflation is around 30-40 percent.

“Vegetables are a staple, people will not reduce consumption. Instead, they will take a hit on their household budget. So it does constrain consumption,” said Mitra.

Another key reason causing the lag is the central bank’s crackdown on unsecured lending. With microfinance institutions and other BFSI firms slowing down the pace of lending to unsecured customers, which are usually in the same segment of low to mid-income consumers, leading to less disposable capital in consumers’ hands.

“Essentially, both of these factors have come together and we are kind of seeing a bit of an impact of both of them coming together in the urban slowdown,” Mitra added.

A cyclical slowdown or a seasonal blip?

Some chatter on D-Street suggested that the slowdown seen could be a confluence of seasonal factors: heavy rains impacting some consumption, the delayed festive season, or a high base from the previous year.

While these factors may have some impact, according to Mitra, the slowdown is more cyclical in nature. If rains were a problem, only certain categories such as beverages or other out-of-home consumption would see a slowdown. However, this slowdown is seen across consumer categories, he said.

Bet on ‘Affluent India’

The ‘Affluent India’ theme seems to be more insulated than general consumption. This deals with the top 50 to 60 million consumers of India who have a per capita income of more than $10,000.

Sectors like travel, premium FMCG, leisure, or jewellery fall under this category. “Those categories should still remain quite resilient, which it has been till now. We don't see any reason why it should slow down,” said Mitra.

Even in FMCG companies that reported a slowdown, the premium portion of their portfolios grew in double-digits. “None of these factors impact the top-end consumer. These consumers do not take unsecured loans or do not get impacted by food inflation,” Mitra said.

So, that segment of products or categories, I think remains very resilient in this environment, he added. Categories that cater to this upper-income are scaling up: air care, pet care, liquid detergent, or premium beauty.

Mitra suggested that investors look towards companies which are able to address these opportunities in a more meaningful way, or firms which are able to invest a little more aggressively in these segments.

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