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Sensex at 50,000: Invest in quality consumption stocks for solid long-term returns

Capitalize on this investment theme by building a portfolio of 10-15 high-quality companies that are market leaders

January 21, 2021 / 09:58 AM IST

Most investors are constantly looking for stock tips from their brokers, friends, family, colleagues, etc. While some tips yield profits, most don’t. This form of investing is risky since the possibility of losing capital is high. What if you were given an investment theme that not only carries significantly lower risk, but also has the potential to be highly profitable?  Why must one believe in Indian consumption story? Read on to find out more.

Demographics and lifestyle upgrade

India is a young country; in other words, nearly 64 percent of the population is in the age bracket of 15 to 64 years. This category of citizens is a major consumer of goods and services, as is validated by a report from the Boston Consulting Group (BCG), which states that India is expected to become the third-largest consumer market in the world by 2025. The report further states that consumption in India is set to triple to $4 trillion by 2025 as rising income drives changes in consumer behaviours and spending patterns that have critical implications for companies. It states that the year-on-year expenditure growth in India, at 12 percent, is more than double the anticipated global rate of 5 percent.

According to a report from the National Commission on Population (NCP) under the Ministry of Health and Family Welfare, India’s urban population will increase from 377 million in 2011 to 594 million in 2036 – a growth of 57 percent. In other words, with people shifting to urban areas, there will be a marked improvement in their lifestyles, and a consequent increase in consumption.

Consumption expenditure

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According to the World Bank, consumption constitutes a little more than 72 percent of the country’s GDP. There are numerous indicators of an increase in consumption expenditure in the country such as growth in demand for smartphones, appliances, electronics, etc. According to the BCG report (mentioned above), the country’s smartphone user base is expected to be close to 1 billion at a run rate of about 78 million new users being added per year by the end of 2025. As per IBEF (India Brand Equity Foundation), the appliances and consumer electronics industry is expected to double to Rs 1.48 lakh crore (US$ 21.18 billion) by 2025.

Features of the consumption theme:

The consumption sector is a compelling investment theme for the following reasons:

-Goods and services offered by this sector are in continuous demand irrespective of business cycles, climate, geo-politics, etc. For example, consumers will need food / consumer staples throughout the year.

-With increasing population and better lifestyles, demand for consumption goods and services are constantly on the rise. For example, sales of mobile phones have been on the rise due to increasing demand.

-Consumption stocks are usually less volatile as compared to the market. This is because, consumer businesses are more stable in terms of business growth (turnover and profits usually grow at a steady pace).

Which are the sectors to look for in the consumption theme?

Investing in companies manufacturing / providing services for retail consumption such as staples, telecom, pharma, etc. is a good idea. If you invest in consumption-based sectors and stocks for the long term (five years or more), it will help you ride the consumption boom to grow your wealth exponentially.

-Consumer Staples: Food, Beverages (alcoholic and non-alcoholic), household items, tobacco, hygiene products: These include basic sustenance products such as aatta, rice, tea, coffee, detergents, soaps, etc. that are daily necessities for consumers.

-Consumer Pharmaceuticals & Healthcare: Healthcare is a necessity, which has gained even more prominence with the COVID-19 pandemic. Healthcare encompasses all segments, including medicines, pathology labs, hospitals, etc.

Consumer Utilities: Water, Gas, Electricity & Internet etc. These are fundamental utilities which are basic necessities of life.

Consumer Technology: Ecommerce, job portals, food techs, match making services, etc. With an increasing shift to online purchases/shopping, these businesses have become an integral part of consumers’ lifestyle.

Consumer Finance: Life Insurance, health Insurance & asset management. These services form an important part of consumers’ risk mitigation, finance and healthcare needs.

Stock selection parameters

While selecting stocks within the consumption theme, consider the following parameters:

Market share: Select stocks that have a dominant or growing market share in the segment. For example, HUL is dominant in the personal care and home care categories.

Sales growth: Look for stocks which are recording sales growth that is higher than the rate of the industry they belong to; for example, Asian Paints is not only a market leader in its industry, but is growing at a higher rate than its peers.

Consistent innovation: Opt for companies that are constantly introducing new products/services; examples are Nestle, Colgate, ITC, etc.

Disruption within the industry: Look for companies that change the industry dynamics to their advantage; Reliance Jio is an example where the company has changed the structure of the telecom industry to emerge as the market leader.

Value Migration: Value migration implies changing the business model/dynamics to offer a better product/experience to consumers. For instance, there has been a clear value shift from cable television to OTT platforms such as Netflix, Amazon Prime, Hotstar and SonyLiv`.

Construct Portfolio:

Capitalize on this investment theme by building a portfolio of 10-15 high-quality companies that are market leaders in these sectors to generate inflation-adjusted, risk-adjusted, tax-efficient returns over the long-term with below-average market risk. Grow your wealth in sync with the consumption boom.

Disclaimer: The above stock examples are for information purposes only!



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Vinayak Savanur is founder & CIO at Sukhanidhi Investment Advisors, a SEBI registered equity investment advisory firm
first published: Jan 21, 2021 09:25 am
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