Devotees of the consumption story argued that there were no alternatives to most of the well-established players in the sector
The steep fall in shares of NBFCs has been well documented, but the steady slide in the stock prices of consumer companies has been less obvious. Not long back, investors were willing to pay exorbitant prices for a slice of the consumption story. These companies were reporting good earnings with consumption being one of the main drivers of economic growth.
But that alone was not the reason for the dizzying valuations — 50 to 60 times one year forward earnings — that most of these stocks enjoyed. Devotees of the consumption story argued that there were no alternatives to most of the well-established players in the sector.
So a combination of decent earnings and dominant player status kept pushing prices north.
But the bruising market sell-off is prompting even the most die-hard consumption story fans to question the rich valuations. High fliers like Eicher Motors and Page Industries, to name a few, are down over 30 percent from their 52-week highs.
It has not been as bad for many of the frontline fast moving consumer goods names where the fall from the peak is similar to that in the Sensex and Nifty.
Still, market veterans feel investors’ love affair with consumption stocks may have ended for now. Among the factors hurting sentiment for these stocks — particularly auto — is the decision by NBFCs to cut back on lending following the liquidity scare in late September-early October. NBFCs have been a big driver of the consumption boom over the last many years, lending aggressively to retail borrowers to whom banks are reluctant to lend.
Another factor working against consumption stocks is the latest GDP data showing an uptick in investments and a slowdown in private consumption. This could make many of the beaten down cyclical stocks look attractive relative to the overvalued consumption plays.
Market watchers don’t see shares of consumer companies collapsing in the short term. Barring a few heavyweight FMCG names like HUL and ITC, the stocks are illiquid and hard to sell. Given that these stocks have traditionally traded at a premium, and are fundamentally sound, fund managers may grit their teeth and hang on to them. But new believers in the consumption may be hard to come by any time soon.
