India is on the cusp of a multi-decade growth in some consumer discretionary categories, making it very exciting and interesting for those who believe in bottom-up stock selection. Consumer discretionary refers to the goods and services that are considered non-essential by consumers, but desirable if their available income is sufficient to purchase these. Companies in the consumer discretionary sector sell non-essential goods and services, such as appliances, cars, and entertainment.
Premiumization in discretionary segment
From a premiumization perspective and potential, if we consider a standard 100-gram bar of soap, the range of soaps available in the market is between ₹20 and ₹100. Sports shoes or sneakers are available in the market for prices less than ₹500, while premium products can cost up to ₹20,000. So, discretionary categories have a significant part of value coming from premium products. Again, because this is a play on desires and aspirations, this premiumization journey can be unlimited.
Fast growing economy and discretionary spending
When disposable income grows in an economy, staples has low leverage. In comparison, discretionary categories tend to have a significantly higher multiplier, making it very interesting in a fast-growing economy that we all expect India to be for many years. And what all of this leads to from an investment standpoint is that the value creation skew between companies tends to be low to medium when it comes to consumer staples but extremely high when it comes to discretionary. And what that means for bottom up stock selection is that the sector can be a gold mine.
Almost 300 million Indian households are at the beginning of their discretionary consumption cycle, which can go on for decades as long as income growth plays out well. The rise in disposable income has a multiplier effect on discretionary consumption, and magic in consumer discretionary happens when three things come together: disposable income, aspirations, and access.
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We believe three core drivers make the consumer discretionary space attractive. The first is the income pyramid in the country, which will move from a pyramid shape to that of a diamond, and that’s the basic expectation that we will have a significantly larger middle class in the country. The aspirant or the struggler class will shrink in absolute terms and become a much lower share of the population over time. Second is that the cost of Internet access has decreased, which has led to a significant increase in internet penetration, which has fuelled aspirations. The last one is the young population.
The investable universe in India has expanded significantly in this space, and several consumer discretionary names are in S&P BSE 500. In September 2012, as many as 35 consumer discretionary stocks were split roughly equally between auto and non-auto categories. If one looks at the same today, there are 71 consumer discretionary stocks, out of which 43 are non-auto, with a multitude of listings in several niche segments.
This space can grow quickly, and thus the discipline from a financial perspective while growing becomes of utmost importance. From a financial discipline standpoint, there is a healthy trade-off between incremental return on invested capital (ROIC) and growth that companies need to strike from a financial perspective.
Chirag Patel is co-head – products, WhiteOak Capital AMC.
Updated: 12 Jun 2023, 11:05 PM IST