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Consumer sector: It's time to pick the winners

Source : BUSINESS_STANDARD
Last Updated: Tue, Nov 27, 2012 19:31 hrs
Workers arrange consumable goods at a grocery store in Lucknow

Over the last year-and-a-half, consumer companies have done a number of things to stay on the growth track. Whether it is improving penetration through direct distribution, refreshing existing product portfolio or taking price hikes, companies have used several levers to grow profitably. However, most of this is in the stock prices, which are at a multi-year high. Given that Q2 has seen a slowdown in volume growth, it's time to ask if consumer stocks will continue to deliver bang for the buck.

Every now and then, analysts start writing the obituary of "expensive" consumer stocks but this might not be the best way to pick winners. All companies in the sector will not grow at the same pace. Several factors will impact the sales and margins of key players. The sector's 17 per cent sales growth was driven equally by volume and value. Going forward, value-led growth will slow down. With commodity prices cooling, the unorganised players are back in the fray and large players will not be able to sustain higher prices in the face of increased competition. The sector's volume growth is already down to single digits from the double digit levels seen in the last three quarters. Despite the slowdown in growth across categories, players like Godrej Consumer, Marico and Colgate continued to record higher-than-category growth, explains BRICS Securities.

Given that significant margin expansion is not expected over the next couple of quarters, it's best to focus on players who can continue to grow. Current valuations of most companies are factoring in high growth and even higher margins, which might not sustain in times to come. Deutsche Bank's research team says its reverse discounted cash flow workings show sales growth requirement of most companies is very high.

So, which companies will continue to do well and which would not deliver on growth? Analysts are, as always, divided on this, too. While some prefer discretionary over staples, from the look of it food has been given a unanimous thumbs-down. Deutsche analysts like opportunities in discretionary consumption over staples in the long term and their top buys are ITC, Marico and Titan. Dabur and Nestle India are their top sells. Religare, too, prefers high quality consumer discretionary franchisees (Titan, Bata and Page Industries) in the current cyclical weakness, over consumer staples with rich valuations. The packaged food business is facing multiple headwinds. For one, most food companies stopped innovating in the face of high food inflation, which hurt consumer demand even further. So, it's going to be a while before demand for packaged foods picks up again.


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