The rally in India’s largest consumer stocks has likely run its course as margins are near historical highs and the firms appear reluctant to boost investment, according to one of the nation’s biggest money managers.
“We think earnings growth will disappoint,” said Anish Tawakley, who oversees about $ 4.8 billion as deputy equity chief investment officer at ICICI Prudential Asset Management in Mumbai. “We don’t think volumes will recover unless these companies ramp up investments — brand building, marketing, product innovation, consumer spending.”
The global reopening from the pandemic boosted consumer shares around the world, especially in India where the domestic demand story has long been touted by global funds, leading to billions in inflows in the second half of 2022. Still, as inflation accelerates and hits the rural population particularly hard, cracks are emerging in the the country’s consumption dynamic.
An index of India’s consumer goods firms has dropped about 3% from its peak earlier this month and is now little changed this year after jumping 17% in 2022. That’s still better than the broader S&P BSE Sensex Index, which has fallen 2.6% since the end of December.
The ICICI Prudential Focused Bluechip Equity Fund co-managed by Tawakley has beaten 94% of its peers over the past three years, data compiled by Bloomberg show.
A number of big consumer players, including ITC Ltd. and Hindustan Unilever Ltd., saw profit margins jump in the latest earnings season, leading some analysts to question whether there’s much scope for further increases. At the same time, their broader performance was dragged down by the rural segment.
The negative impact of inflation will lead to a decline in middle-income consumption across categories such as quick-service restaurants, food delivery, paints and durable goods, Goldman Sachs Group Inc. said in a note last week.
India’s core inflation has exceeded 6% for the past 16 months, threatening to weigh on economic growth and consumer spending. The central bank expects the consumer price index to average 6.5% in the current fiscal year to March.
Tawakley said for one of his other funds he has lowered his allocation to metals and non-bank financial companies, and is instead leaning toward housing and construction-related sectors on expectations of positive earnings surprises.
