Portfolio

Will demand hold up?

Aarati Krishnan | Updated on November 10, 2017 Published on February 19, 2011

Consumers have a wide range of electronic goods to choose from this Deepavali in Madurai. Photo G.Moorthy.   -  The Hindu

One key worry for investors in consumer stocks is, even if companies manage to maintain margins and survive interest rates, will consumers continue to spend like before?

No doubt, runaway inflation or bloating EMIs could scare consumers into putting off their purchase decisions.

However, there are mitigating factors.

While high inflation does prompt consumers in select FMCG staples (such as edible oils, hair oils, soaps, detergents) to downtrade, this has been offset in recent times by a secular trend of rural consumers moving up the value chain.

This is because higher food inflation usually stems from rising farm product prices, which usually feeds into rural income. This year, buoyant farm prices are topped off by bountiful agricultural output, arming rural households with the wherewithal to spend generously.

This means fairly robust demand for companies with a substantial rural leg to their sales such as Hindustan Unilever, Dabur and Colgate. Big-ticket purchases too may survive interest rate hikes.

Over the past five years, demand for homes, cars or durables has been much more responsive to the income prospects of consumers than to interest rate movements or even prices.

You decide to buy a new home because you are sure of your employment prospects and a bigger pay cheque; not because you think interest rates have bottomed out!

A rosy corporate hiring outlook, India Inc's return to 10-15 per cent annual pay hikes and IT companies complaining about attrition, are signs that all is well with consumer confidence in India.

Finally, there is also the optimistic possibility that the scare about sustained double-digit inflation or runaway interest rates will not even materialise.

The ‘food' part of inflation may quietly fizzle out, as recent harvests flood the market and the RBI may choose to fight the inflation battle with weapons other than interest rates.

Overall, the above arguments make this a good time to accumulate consumer stocks that have seen valuations correct in the market decline.



Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

Published on February 19, 2011
null
This article is closed for comments.
Please Email the Editor