The slump has become pronounced in recent months and experts say it may persist for a few quarters.
Getty ImagesMost stocks from consumption-based sectors have reacted negatively to the slowdown.
Consumption, one of the key growth drivers of the economy, is on the slow lane. Though the slowdown started in high-ticket segments like real estate, auto and consumer durables thanks to the credit squeeze triggered by the NBFC crisis, it has now spread to other sectors. Consequently, the GDP growth rate for the first quarter of 2019-20 fell to a 6-year low of 5%. There was more bad news for investors. Experts say this slowdown will continue for some more time.
“High frequency indicators like monthly auto numbers are showing that the second quarter will also be weak. Revival is expected only from the third quarter,” says Navneet Munot, ED & CIO, SBI Mutual Fund. Expectations of revival from the third quarter is based on recent government and RBI actions that can reduce pain the short-term.
For example, the decision to increase depreciation rate for cars from 15% per annum to 30% may increase demand. Aggressive reduction of repo rates by RBI is another factor that may help push loan-based consumption in the third quarter. The question is will the recent fall in the rupee push up inflation and stop the RBI from cutting rates further? “Weakness of the rupee is partly due to the dollar strengthening against other currencies. This is keeping global commodity prices down, so inflation should remain in the RBI’s comfort zone. We expect RBI to bring down the repo rate from 5.4% to 5% in the next two meetings,” says Munot.
RBI made several rate reductions in the past, but banks failed to pass on the cuts to customers. RBI finally cracked the whip and asked all banks to link their retail loan products to repo rates from 1 October. This move is expected to make home and car loans cheaper. Some PSU banks have already started implementing this, bringing down loan rates. For example, repo-linked home loan rates of SBI is now at 8.05% compared to the MCLR-based home loan rate of 8.5%. More importantly, any repo rate cut by RBI will now be automatically passed on to all retail loan customers who are under the floating rate regime.
Most stocks from consumption-based sectors have reacted negatively to the slowdown. Should you get carried away with the ongoing negative sentiments or should you use this phase as a buying opportunity? Experts advise the latter route. “Current sentiments toward consumption-based sectors are very negative and this augers well for future returns from them,” says Munot. Since the consumption-based basket is big, let us analyse the slowdown impact on different segments.
1. FMCG ITC: Potential upside: 35%
Current price (Rs)
PE
PBV
Div Yield
1-yr target price (Rs)
243.15
23.29
5.15
2.36
329.41
Analysts’ recommendations Buy: 30 Hold: 5 Sell: 1
This is the least affected segment. While high-ticket consumer discretionary items are selling at a sluggish pace, the same cannot be said for daily staples. For example, recent news reports about falling biscuit sales turned out to be a hoax. It was a bid by some biscuit manufactures to bring down GST rates on biscuits from 18% to 5%. “As per industry data, cookie sales are showing healthy growth,” says Gaurav Dua, Head, Research, Sharekhan.
While several companies in this segment—Bata, HUL, Marico, etc—have beaten slowdown blues or reported limited impact, most continue to be highly priced and therefore, don’t offer much upside potential from current levels. However, analysts are bullish on ITC due to its low valuation, despite weak growth of the cigarette business. “We like ITC because it is the cheapest stock among the large FMCG companies. The issues with its volume growth is already in the price,” says Dua.
This segment is a mixed bag and there is no pressure on low priced consumer durables and electrical appliances. For example, light electrical divisions of Havells, Crompton Greaves and V-Guard have grown by 24%, 16% and 18% respectively. However, most companies are facing issues in the industrial segments like cables, switch gears, etc due to ongoing troubles in real estate. However, the prospects of companies like TTK Prestige, which caters mostly to the retail segment through its kitchen appliances, are bright.
The management of TTK Prestige plans to double domestic revenues over the next five years using both organic and inorganic opportunities. To maintain its growth rate, the company has introduced several new products in the recent past and many more are expected during this festive season. It is ready for inorganic growth as well. “TTK Prestige continues to carry substantial free cash and is continuously seeking acquisition opportunities”, says a recent ICICI report.
High-priced consumer durables— refrigerators, washing machines, televisions, air conditioners—that are mostly bought using consumer finance, continue to be under pressure. However, recovery is also not far away. “After the recovery in low-ticket durables, next to recover will be white goods. This is expected well before the recovery in the auto sector,” says Dua.
In addition to the general consumption slowdown, the auto sector is also plagued by sector-specific issues. These include the increase in third party insurance cover, increase in road tax, increased costs due to expected implementation of BS-6 norms from April 2020, etc. The government’s decision to go back on implementing strict axle norms (allowing trucks to carry loads beyond their official capacity) is also negatively impacting commercial vehicle sales. The ongoing destocking by dealers, because of credit issues and slowdown worries, is also adding to the auto sector’s slowdown woes.
A small fall in volume year-on-year and a small increase month-on-month meant the two wheeler segment did relatively better in August. As in the consumer durable segment, low price and lower component of finance are the main reasons for this. While the cut in passenger vehicle was big, cut in commercial vehicle was severe. For example, the y-o-y volume drop of Tata Motors and Ashok Leyland are at 48% and 47% respectively.
Auto sector stocks are reacting to these bad numbers. Should you buy them? It depends not just on price correction, but also valuation. Most two-wheeler stocks are still priced high. The situation is no different for car manufacturers. “While Maruti stock price has come down by 40%, its consensus EPS estimate for 2020-21 also fell by around 30%, so there is no big change in its valuation,” says Dua.
Just like sales volume, the share price of heavy commercial vehicle manufacturers like Ashok Leyland and Tata Motors fell 50% and 56% respectively during the past year. Though prospects of these companies are linked to overall economical cycles, analysts expect a revival in the CV industry during the second half due to pre-buying before BS-VI norms are introduced. “Any revival in CV industry due to pre-buying would benefit Ashok Leyland owing to its strong market share, diversified portfolio, brand and distribution network,” says a recent Angel Broking report. It is better to avoid Tata Motors because it is facing global slowdown and its JLR sales for the month of August fell by 21% y-o-y in UK and 10% in USA.
4. REAL ESTATE PHOENIX MILLS: Potential upside: 18%
Current price (Rs)
PE
PBV
Div Yield
1-yr target price (Rs)
670.3
20.71
4
0.39
792
Analysts’ recommendations Buy: 15 Hold: 1 Sell: 0
Two parts of the real estate market— commercial and housing—are behaving differently. Commercial real estate is booming now due to falling vacancies and strong rentals. The growth in this segment is also supported by continued funding from institutional investors. Despite the overall consumption slowdown, there is no threat to the retail mall space growth story and that is the reason why analysts continue to be bullish on Phoenix Mills. “Phoenix Mills provides a unique way to play India’s retail growth story due to a strong track record of execution, scalability as reflected in its line-up of five new under-construction malls and robust cash generation,” says a recent Motilal Oswal report.
Even before the recent liquidity crisis, the housing segment was going through pains like muted sales, high inventory, stagnant or flat prices, etc. While the pain will continue for some more time, the large listed players are getting stronger. An unprecedented consolidation wave is now sweeping through India’s realty sector because smaller players are struggling to survive due to outsized market share gains by strong organised developers.
“Number developers plunged about 46% between 2011–12 and 2017–18 and hence, we envisage that the share of top 10 developers in housing demand across major cities to touch around 50-60% (from 20-40% currently) over the medium term,” says a recent Edelweiss Finance report. In other words, the worst is already over for organised players. Most strong players like Godrej Properties are already pricing in these positives and therefore, don’t offer much upside from current levels.
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