Chanchal Khandelwal, Fund Manager, Aditya Birla Sun Life AMC Limited, gives his outlook on the consumption sector for 2022
With post-pandemic economic recovery, which pockets of the consumption space will lead in 2022? What's the outlook for FMCG stocks against the backdrop of dismal returns in 2021?
In a country where the demographic mix (more than 70 per cent population less than 35 years age), per-capita consumption (one of the lowest in emerging markets), and category penetration (many categories less than 30 per cent) indicate that there is a long road to be covered, the consumption theme will play for many years to come. The last 15 years saw discretionary consumption move from 15 per cent to 25 per cent and we believe in the next decade, it can go to 40 per cent.
Contingent to any subsequent COVID waves, the discretionary categories (lifestyle consumption, like travel; luggage and shoes; beauty and personal care; and home improvement) should do well in 2022. We believe this recovery can surprise in the next leg of per-capita income growth. COVID has taught consumers the importance of owning and upgrading their homes and this theme can play for a decade. The trend of the big becoming bigger will continue. Businesses that have gained market share from the unorganised sector in the past 18 months, such as paints, jewellery companies, organised QSR (quick service restaurants), etc., will further strengthen their moats and continue to gain market share.
As far as FMCG is concerned, the next year can be better than this year as now valuations are at par with the historical average and worse of inflation will be behind us. We will see the FMCG sector delivering better absolute return as earning growth improves. But when broader earning growth catches up, which we believe will be in the next two to three years, this pack will give lower relative returns. If you recall FMCG did well when broader earnings growth of the market suffered from FY14-20. Now corporate-earnings cycle is changing - FY21 saw 15 per cent earnings growth in Nifty (best in a decade) and we expect 35 per cent earnings growth in FY22. This will mean more sectors contributing to earnings. When broader market recovers, cyclicals/economy-related plays perform better than traditional defensives. Therefore, consumer discretionary looks better placed than staples as per our assessment.
This interview was conducted in December 2021.
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