Why blame Ravi Shankar Prasad? Economy is showing Lipstick Effect!

It’s the Lipstick Effect, stupid!

Union Minister Ravi Shankar Prasad may have been forced to withdraw the statement in which he had cited the Rs 120 crore business done by three Bollywood movies on a single day to suggest strength in the fundamentals of the Indian economy, but he was actually articulating a real economic phenomenon playing out in India currently.

It indeed is puzzling to see Bollywood keep the cash registers ringing at the Box Office when most segments of the economy are showing telltale signs of slowdown.

It does not mean the movie industry is defying the slowdown. It’s the ‘Lipstick Effect’ at play – an economic phenomenon in which consumers spend money on smaller indulgences in times of recessions and economic downturns, or when they have less cash.

Robert Browning tried to define it when he said: “What youth deemed crystal, age finds out was dew.”

This trend is usually noticed more regularly in luxury items of lesser ticket prices. “The Lipstick Effect shows up in the economy in one form or the other most of the times. It becomes more pronounced in times of slowdown, particularly in discretionary spend. This is exactly the situation we are in today,” Amit Khurana, Head of Equities at Dolat Capital, told ETMarkets.com.

“Yes, the Indian economy is currently facing this situation partially,” says G Chokkalingam, Founder of Equinomics Research and Advisory. “Finding growth in this market is a difficult task.”

During an economic slowdown, consumers prefer items with small ticket sizes or cut down on consumption. They stick to favourite brands, but buy less.

Media, entertainment, travel and leisure-linked stocks are all showing this effect, which has been most pronounced in multiplex stocks. Shares of PVR have risen 11.94 per cent on year-to-date basis till October 14, while those of Inox Leisure have gained 34.86 per cent to hover around their 52-week high levels.

A quick glance at 93-odd discretionary stocks from sectors like media, entertainment, leisure, multiplex, restaurant chains and theme parks showed 78 of them have failed to deliver positive returns this year, while eight have registered growth in double digits.

Leading the wealth destroyers was Cox & Kings, which eroded 98 per cent of investor money on a year-to-date basis. It was followed by Coffee day Enterprises, Eros International Media, Adlabs Entertainment, BAG Films, Sri Adhikari Brothers and Hotel Leela Ventures, which have halved their stock prices.

Among the big wealth creators, Cinevista has risen 141 per cent, Jump Networks 130 per cent, Tips Industries 18 per cent, Mac Charles India 16 per cent, VST Industries 14 per cent and Godfrey Phillips 10 per cent.

“Do not paint all stocks with the same brush. Not all media and entertainment companies appeal directly to consumers,” said Khurana. These stocks have taken a hit mostly because of derating, downgrading, overleveraging and corporate governance issues.

“It will not be fair to say that these stocks have been wealth destroyers on an aggregate basis. Stock-specific reasons have kept investors’ risk appetite subdued,” he said.

What’s fuelling rally in multiplex stocks?
Movies like Kabir Singh, War, Uri, Bharat and Mission Mangal each grossed over Rs 200 crore on Box Office this year. Similarly, Kesari, Total Dhamal, Super 30, Chhichore, Dream Girl, Gully Boy and Saaho made their way into the Rs 100 crore club.

This encapsulates a trend of consumers’ shift into smaller indulgences from expensive discretionary spends that benefit hotel, travel and leisure sectors.

“Movie is small-ticket luxury in India, while travel, hotels and amusement or theme parks are not small-ticket consumption. Also, a movie theatre is located nearby, requiring less commuting cost. High Box Office collections are a classic example of the Lipstick Effect at play in the economy,” says Khurana of Dolat Capital.

The Way Forward
Investors are keeping a keen eye on India Inc’s September quarter earnings. Sectors like banking, telecom, metals, resources, IT and pharma have been signalling slower growth in recent times.

Khurana says a stock like Bata or quick-service restaurant chains should benefit from this effect. “Footwear as a sector should continue to outperform on the consumption side. Watch out for the earnings numbers from PVR and Jubilant,” he said.

Chokkalingam advised investors to refrain from buying richly-valued stocks. He said MNC pharma could be a good bet. “Unless corporate earnings draw investors to other sectors, FMCG and leisure stocks will continue to head northward,” he said.