Consumption stocks near bottom, recovery hinges on growth prospects: Morgan Stanley

Mass discretionary spending, particularly in food & beverage and value retail, is better positioned than consumer staples.

The consumption sector might be closer to the bottom of the ongoing sell-off, said global broking major Morgan Stanley. As sky high valuations weighed on investor sentiment, consumption staples have tanked sharply from their highs, with the Nifty FMCG index cracking 11 percent for the month of February.

However, for these stocks' valuations to re-rate, market participants will require confirmation of growth recovery, added the brokerage. Over the past few quarters, urban consumption was seeing pain as demand from metro and tier-1 cities lagged.

Compared to consumer staples, mass discretionary consumption, such as quick service restaurants and innerwear, is better positioned for recovery than staples. Morgan Stanley also prefers the food & beverage sector over home and personal care segments, respectively. Further, competitive intensity in the paint segment has increased, de- rating is unlikely to stall.

On the discretionary consumption front, Morgan Stanley is backing the leaders. Among value retailers, tier-2 market players are better placed than metro and Tier-1 players.

The brokerage's top overweight stocks in the consumption space are:

• ITC
• Jubilant FoodWorks
• Nykaa
• Page Industries
• Tata Consumer Products
• Titan
• Trent
• Varun Beverages

• Asian Paints
• Berger Paints
• Avenue Supermarts
• Nestlé

Last month, Morgan Stanley  stated that the consumer staples demand trends for the December quarter improved on a sequential basis, but were still subdued compared to expectations. Going ahead, international brokerage Morgan Stanley expects that demand trends will remain moderate.

On the company specific front, Marico and Varun Beverages remain optimistic about double-digit growth. The growth outlook and guidance from most other companies remains cautious, as margins remained within a guided range.

The volumes during the quarter were weak as well, owing to muted demand, while value growth improved due to price hikes.  The rural volume growth ahead of urban for the fourth consecutive quarter, with the brokerage noting that the urban slowdown overpowered the rural recovery.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.