Mutual Fund Summit | Axis AMC’s CIO sees less scope for margin expansion in consumption shares

When the recovery happens, we will only get better top-line growth driven recovery. We will not really have a margin expansion,” Gupta said.

Several consumption stocks continue to trade at elevated valuations despite a muted consumer demand and underwhelming volume growth, which leaves little scope for margin expansion going forward, Axis AMC’s CIO Ashish Gupta said at the Moneycontrol Mutual Fund Summit on June 23.

“I think the margin of safety, actually even in a lot of consumption names is very low, and unfortunately, what we have seen is that while consumer demand has been low and a lot of consumer companies have disappointed in terms of volume growth and top-line growth, we haven't seen a margin collapse," Ashish Gupta said, adding that this resilience in margins, while seemingly positive, limits the potential for earnings surprises once demand returns. “So, when the recovery happens, we will only get better top-line growth driven recovery. We will not really have a margin expansion,” Gupta said.

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Gupta explained the typical triggers for a valuation re-rating. “When we look at any kind of big re-rating story, there are three components. One is top-line growth coming back. Second is with top-line growth, operating leverage kicks in and your profit grows faster than top-line. And third, you see a valuation re-rating.”

For consumption, however, he believes the latter two factors appear missing. “(Because) While top-line growth has slowed, margins are still high and actually multiples are still not cheap,” he said.

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As a result, despite relative underperformance compared to investment-led sectors, consumption names still appear expensive in absolute terms. “Yes, they would have underperformed a lot of the investment side stocks, but absolute multiples of most consumption names are as pricey as they were,” he added.

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