We all know that the famed fable of the India growth story is woven around the thesis of consumption. It is also widely accepted that a rapid rise in economic growth and consumption demand feeds into each other and helps both the variables to grow seemingly together. This is the simple logic that explains today’s rounds of discussions about a slowing economy and the need to spur consumer spending for the country to get back into the eight per cent plus growth of yester years.
In the stock market too, consumer-facing companies are always regarded as sure bets at all times – be it a bull or a bear market. The segment has thrown up umpteen multibagger stocks despite the consistent market volatility.
Last decade saw large consumer-facing companies successfully compounding earnings thereby creating substantial investor wealth.
Fund houses—both domestic and foreign including smart equity investors—have compounded wealth from such blue chip stocks like Asian Paints, Britannia, Colgate, Dabur, HUL, HDFC Bank, HDFC, Maruti, RIL and Titan. It goes without saying that these companies have been multiplying investors’ wealth durably both in the bull and bear phases.
By all means and any yardstick, consumer-facing companies are and will remain as the preferred picks for investors, despite the ups and downs in indices or the gyrations in the fear gauge. This is because India has all the trappings to fuel the growth of consumer facing companies. For instance, in a large democracy like India with favourable demographic dividend being played out the aspiring middle class population acts as a potent demand driver of force multiplier for consumer-facing companies. This has been proved unequivocally through the last decade with resounding success of companies like Kotak Bank, Bajaj Finance, Bajaj Finserv, United Spirits and United Breweries to name a few. The list will get longer if we probe a little more about the stocks that are trending in the market for a longer period.
Moreover, India continues to remain an under-penetrated market in several categories like personal care, packaged foods, consumer durables and insurance and the emergence of highly successful business-to-consumer (B2C) companies like Avenue Supermart, Whirlpool and HDFC Life Insurance prove this hypothesis. Their success underpins the argument that consumer-facing companies create wealth for investors in multiples over a period of time, though instant gratification cannot be guaranteed.
As a matter of fact it would be of interest to know that unless the addressable market size itself is small or when the promoters have messed up their affairs in other ventures stretching their finances and hence putting the company’s future at risk, most consumer-facing listed entities have a successful track record of strong free cash flow generation coupled with superior return ratios. In other words well managed consumer facing entities, which are following the gold standards of corporate governance never disappointed investors when it comes to multiplying their wealth over a longer period of time.
This is clearly evident from the fact that even during the recent crisis that roiled the non banking finance companies space and the growing pain points in the economy leading to a slowdown in economic expansion, smart investors have been quick to tap the consumption theme since random reading of the price-to-earning- ratios of such companies would make them miss out on long term opportunities. Moreover the Goods and Services Tax together with the recent corporate tax cuts puts these B2C branded consumer companies in a sweet spot going forward. Therefore, the sage advice for investors is to bet on such consumer facing companies for long term wealth creation since the India growth story is here to stay.
The author is Head of Research at LKP Securities