Nippon AMC’s fund manager is gorging on pizza and biking his way to the hinterland

Managing over Rs 8,500 crore across Nippon India Balanced Advantage Fund, Nippon India Vision Fund, and Nippon India Consumption Fund, Kalkundrikar seems bullish on the sector.

Consumer stocks are making a splash on the bourses, fueled by hopes of better growth and favorable government policies. Despite their rich valuations, with the BSE Consumer index trading at a P/E multiple of 98.88 times compared to Nifty 50's 23.66, the excitement is palpable. Will this sector's growth surge keep the momentum going, or will high multiples and buoyancy in other economy-sensitive sectors put the brakes on?

In this exclusive interview with Moneycontrol, Nippon India AMC’s Amar Kalkundrikar takes on the tough questions. Managing over Rs 8,500 crore across Nippon India Balanced Advantage Fund, Nippon India Vision Fund, and Nippon India Consumption Fund, Kalkundrikar seems bullish on the sector. The three funds have returned 15.25 percent, 18.49 percent and 15.88 percent since inception.

Also read: FPI fund flows to see a turnaround in second half of 2024; interest high in consumption theme: Jefferies

There is a sudden optimism for the consumption theme, post the election results. Your take.

Even prior to the elections, signs of double-digit demand growth could be seen in certain consumption segments. Overall, the consumption theme is a longer-term, secular theme driven by rising incomes, aspirations, and brand consciousness among Indian consumers. However, over the past 12 to 18 months, mass consumption has been relatively subdued, with private consumption growing only about three percent despite higher GDP growth rates. This is due to factors like post-Covid inflation, consumer efforts to rebuild savings post-pandemic, and disruptions in the unorganized sector due to commodity price fluctuations. These factors are gradually receding and could be setting the stage for a potential improvement in mass consumption by FY2025.

Do you think consumption will be prioritized in the upcoming Budget?

Wait and watch. In the last few years, the government has concentrated more on infrastructure and less on subsidies. But even without that support, the consumption space is well-placed at this stage.

Also read: India's consumption spending inequality fell in 2022-23 vs 2011-12: Survey

Which consumption areas do you see growth?

FMCG companies, QSR, and Telecom should see double-digit earnings growth. Signs of this recovery are beginning to emerge, albeit cautiously. Some QSR companies have shown signs of improvement over the past two quarters after experiencing earnings slowdowns in the preceding four quarters. Improved demand should coincide with profitability enhancements due to operational leverage. In the FMCG sector, a couple of companies have highlighted early green shoots as well. FMCG may witness an uptick in volume growth, but operational leverage might not be as significant. Telecom should experience substantial earnings growth this year if tariff adjustments materialize as expected. Our portfolio is positioned to take advantage of this at the moment.

Do you think autos will continue to do well?

The two-wheeler segment should sustain momentum for at least a year or more, resulting in reasonable top-line and earnings growth.

What’s your take on durables?

The durable goods sector, particularly home improvement products like fans, electric boards, and tiles, could see advancements, especially with a potential uptick in the real estate cycle.

The secular growth story in consumption has not exactly been secular across several categories, nor have we seen high growth.

It’s correct that growth has not been secular. There are various reasons for this. Around 2015-2018, companies prioritized profitability, possibly influenced by global trends led by private equity firms. Regulatory changes, like the amendment in the Weights and Measures Act in 2013, facilitated shrinkflation, meaning product sizes were reduced while prices were kept stable. These indirect price hikes and benefits from GST also helped bigger brands on improving margins significantly over 2013-2020 period, giving opportunity to smaller players rising to challenge established ones. For instance, in the feminine hygiene category, newer brands disrupted the market by offering lower-priced alternatives. This shift towards cheaper variants also occurred in segments like men's razors. Now there is a clear realization that the profitability lever has been fully exhausted, and there is a need to drive growth through volume. Companies that have followed a volume-driven growth approach have been reasonably re-rated in the last 1-2 years as well.

Premiumization has been a big trend everyone has latched on to. Can this sustain?

Premiumization can be seen in across segments, but in some cases like skincare a lot of it is happening outside the listed universe. Larger consumer companies initially underestimated the premiumization trend among affluent urban consumers, but they’re now refocusing on premiumization strategies. So, premiumization should continue, but a bigger trend that will now play out is the cyclical upturn in mass consumption, which will provide opportunities for the big companies to regain market share.

Is there a case to be made for consumer stocks given valuations are still elevated on an absolute basis?

Recent years have witnessed a reduction in the sector's relative premium compared to the broader market. Coupled with emerging green shoots and relatively moderated valuations, this segment appears poised for a reasonable recovery ahead.

Could multiples de-rate further? Do you see continued time correction?

Between 2008 and 2014, earnings growth was robust, driving consumer multiples from around 25 times to 35-40 times. Conversely, from 2014 to 2019, earnings growth was modest, yet multiples increased to 50-55 times. Despite slower earnings growth, multiple expansion occurred because sectors like banking, pharma, and commodities faced challenges, making the consumer sector relatively more attractive. In the post covid phase, while overall valuations have risen significantly across sectors, consumer valuations have stayed relatively constant. This means any potential de-rating would happen only if there is an overall correction across sectors, not just consumer stocks.

Within the consumer sector, are large-caps better placed than mid-caps currently?

Currently, the FMCG sector is dominated by large-cap companies, with few exceptions in small caps. Similarly, the home improvement sector leans towards mid-caps. But we don't prioritize market-cap size in stock selection – we focus on the product's significance and its competitive edge. Overall, large-cap holdings in our portfolios have increased to around 65-70 percent from 45-50 percent previously, reflecting their better value propositions and growth prospects.

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