We started looking at the Indian listed consumer space ~ 2011 and found some of the great multi-baggers of the current days reasonably/cheaply priced. Needless to say, that was a great time.
As an amateur investors, we use to first look at price/valuation and never question the growth. Why, because in our Private equity world, a deal wouldn’t work at at >30x PE entry multiple and a <15% sales CAGR. So sales/earnings growth in excess of 15% was a given. That created a bias to extrapolate the same growth assumptions for listed consumer companies. While the assumption worked for a few, it was mostly wrong. We were lucky to make money in a few of them, but largely due to multiple expansion.
The 5 year sales and earnings CAGR of the top 25 listed consumer stocks is 8% and 15%. Earnings CAGR was partly better due to a benign raw material commodity cycle.
A lion share of the consumer stocks were at rich multiples, which became even richer with time. Average PE of these stocks was 37x 5 years back. Its now ~45x.
Forget the fascination of the capital markets to still stay invested at these multiples, what I really want to talk about today is how/why demand for the listed consumer universe is looking edgy and why their moats are not as solid as they were maybe 5 years back.
Rise of Debt
In the last decade, a large segment of consumption growth has been driven by personal finance. The charts below highlight the drift I want to take in this blog:
Refer to the personal fin loan growth in key segments. Consumption driven loans (durables, vehicle, credit card loans, other personal loans) have grown at a CAGR of >20% over the last 5 years. Analyse this with the backdrop that the household income has grown at 10% during the same period.
Y Axis in INR Billion, Source: RBI
Household debt as a % of household income has been rising fast.
Source: CEIC
What we are staring at is a customer who typically:
Has financed his personal expenditure through short term debt, largely due to easy access and the lure of zero cost EMI.
Has financed his/her her home, which has depreciated in value by 15–20% over the same period.
Hasn’t seen his, income grow as much as his expenses.
Weak Sentiment to spend
What we are looking at is a consumer whose macro sentiment has been largely tepid.
Consumer sentiment on economic situation, Source : RBI
Consumer sentiment on employment , Source : RBI
The same is also highlighted through the expenditure basket:
Volume growth for the discretionary segments such as eating out, beverages, recreation, furnishings/decor, clothes and shoes, durables is muted to say the least.
Sectors that have done well are utilitarian in their consumption: healthcare/wellness, communication, education. While business models are subjective and may vary based on segments, predictability of demand is a plus.
How does this translate into investment recommendations for the next 3-5 years
Personal fin companies will see muted growth. Expensive multiples are a trap and carry an illusion of growth. Will stay away from pure-play personal fin businesses.
Stay away from consumer stories where expenditure can be postponed or can be replaced by lower cost substitutes.
Consumer businesses that have utilitarian consumption demand such as education, healthcare, communication are more predictable and secular. Demand has held well in these segments.
Businesses that have heath/wellness as demand drivers are interesting at a reasonable price. Look for: OTC consumer businesses, diagnostics labs, health/general insurance, domestic pharma.
With average per user data consumption growing 10x in the last 4 years, keen to look at businesses that are riding the communication/data consumption story. Eg: OTTs, internet infrastructure, hardware/software, digital brokers, banks that are using digital interface well to get customers. Will cover this more in the next blog.