Consumer stocks richly valued despite slower growth because of flight-to-safety attitude of investors, says Anand Shah of Axis Capital

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Investors seem to be turning bullish on consumer companies after the Finance Minister's announcement of tax cuts in the Union Budget 2025. In a conversation with Moneycontrol, Anand Shah, Executive Director, Consumer at Axis Capital spoke about the effect tax cuts will have on consumption and other trends in the consumer sector.

Edited excerpts:

How are you looking at the consumer sector?

Stress because of inflation is real. Consumers are cutting down, downgrading, and moving to local players, which is affecting the larger staple companies. Discretionary is slightly better, but we are seeing mixed results. There is a broader consumption slowdown, which will take time to recover. A structural revival in consumption will start only when there is an increase in wage inflation or if food inflation comes down. However, the government has taken the right steps with the tax cuts, so we are hopeful of recovery (in certain quarters, which are not structural in nature) in the second half because of a lower base.

Do you believe the tax cut will drive consumption?
It will, to an extent. The bulk of the tax savings is for people in the income bracket of Rs 12 to Rs 50 lakh. These people will spend more on discretionary items rather than staples. So, categories like QSR, discretionary spending, apparel, and footwear are where the increased expenditure will be directed. Even rate cuts, if any, will likely go toward more discretionary spending rather than bringing staple consumption back, because the latter has structural issues.

Revenue growth of staple companies is in low single digits, but valuations haven’t corrected. Why?
That’s always a debate. If you look back to 2013-14, forward multiples for staple stocks were 35-45x, and growth rates were significantly better. Volumes were higher, and the penetration story was still developing.

Now, these companies are largely penetrated, and growth has slowed. Despite that, these stocks haven’t corrected much. There is always a flight to safety in staple companies during corrections.  However, compared to 10 years ago, FIIs are no longer as bullish on Indian staples. The broader consumption market has expanded, and there are more opportunities in discretionary spending, durables, and other segments.

Some companies seem to attribute the slowdown in urban consumption to quick-commerce growth – what’s the connection?
In urban areas, if people are buying something, they are still making a purchase. A shift in the purchasing channel does not affect overall consumption, as instead of modern trade or Kirana stores, people are now buying from quick-commerce platforms. This does not affect consumption itself, but it does affect listed FMCG players.

Urban general trade (GT) retailers—such as small neighborhood stores and Kirana shops—used to play an active role in driving sales. They did not just wait for consumers to walk in; they actively pushed products, encouraged bulk purchases, and helped create demand.

However, this cycle is now disrupted due to the rise of quick-commerce platforms. GT retailers have more inventory but are experiencing lower sales due to the shift to quick commerce. As a result, they are stocking less, only as much as they can sell, and their motivation to push sales has declined.

Consumers in urban markets may also be stocking less. Pantry stocking—buying multiple soaps, large packs of detergent, or bulk groceries for the month—is not happening now. With everything available within 10 minutes, they may no longer feel the need to stock up. Instead, they are purchasing only what they need when they need it. This means both retailers and consumers are keeping lower inventories, which could be affecting overall consumption patterns.

HUL and Nestlé have been trying to move to e-commerce. Will this be positive or negative for their earnings growth and margins?
If consumers prefer quick commerce, companies will naturally ramp up their presence in that space. The key issue is balancing the collateral impact on urban GT. This shift has happened before: about 10 years ago, when modern trade expanded, there was a concern that it would replace Kirana stores. Over time, an equilibrium was established, and both continued to coexist.

However, modern trade focused more on discounting rather than convenience, while GT prioritised convenience. Quick commerce combines both, making it a stronger proposition. FMCG companies will need to manage these channel dynamics efficiently. They must ensure urban GT remains profitable enough to survive, or else they will experience short-term sales disruptions until quick commerce scales up significantly.

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