‘We are at an inflection point with per capita income close to $2000’
Kartikraj Lakshmanan, Senior Fund Manager of the newly launched BNP Paribas India Consumption Fund talks to Paisabazaar about his outlook on consumption stocks and why now could be a good time to consider investing in them. You can read our NFO note about this fund, here.
Q. As an AMC, in the past, you’ve been fairly bearish on the Indian markets. Do you see consumption as an exception to this broad view or has your assessment of the broader market changed?
A. We haven’t always had a bearish view on the markets as a premise. We have been positive on growth in the past 2 – 3 years because of the reforms that we have seen. We would have been negative on some particular segments of the industry like the investment cycle because there are under-utilized capacity and leverage levels. However otherwise we have been positive on markets. On the consumption space, we have been always positive.
Q. In your presentation you point out that challenges such as GST and demonetisation are behind us, enabling consumption to revive. Do you see consumption as more of a cyclical sector than a defensive one?
A. We believe consumption is a defensive and structural growth story right from demographics, per capita income growth to the market penetration levels. Because of the nature of many of these consumption sectors, they tend to have better returns ratios and better earnings growth profile. This makes consumption stocks defensive if there is at all any volatility in the market. In such circumstances, they tend to behave a little bit better than other sectors. So, they are actually growth plus defensive.
Q. Are you concerned about valuations?
A. Valuations of the consumption segment have always been expensive and that aspect hasn’t decreased much. If at all it has increased. However we have to see this in the light of 2-3 things. One thing is that interest rates today are at least structurally a little bit lower that even 10 years ago because inflation is under control. Another is that because of demonetization and GST, the organized sector is likely to gain market share.
We are at an inflection point where the per capita income is close to USD 2000 (Source: World Bank Estimate). Normally around this level there are quite a few categories which pick up – this is seen with Emerging Markets of similar income levels and demographics. So that’s why we think in the next 5-10 years there could be higher growth. That’s where some of the companies have or the sector as a whole has higher valuation.
We believe there are still pockets where there is even valuation comfort or where there could be commensurate growth opportunity.
Q. Why is now a good time to invest in consumption stocks and is the upcoming general election a major risk factor?
A. Consumption like I said is a far more of a secular theme, as the average age of India is below 30. Close to two-thirds of the population is around 35 years or below. (Source: NSSO, Goldman Sachs Global Investment Research) commensurate growth opportunity) . So we have quite a young population and we have a huge addition to the workforce every year. That is where there will be lot of jobs and people will start to earn. The more people get jobs, higher would be the consumption.
Market penetration is low, the middle class size is clearly growing now and urbanization is likely to pick up. Government measures of, say, building more cities or increasing urban areas are clearly going to work. And whenever urbanization happens, the income levels go up. That’s the trend we have seen globally as well.
So with higher income levels, consumption increases and the consumption patterns also change. Consumers evolve from buying basic necessities to discretionary items. There is far more a structural theme that is likely to play out over the next 5 to 10 years helped by urbanization and the increasing per capita income.
Closer to elections the market tends to have more volatility. But eventually, fundamentals prevail. And that is where the companies with higher and sustainable earnings growth tend to kind of come out of the volatility much better and perform well.
Q. Unlisted players such as Patanjali and e-commerce players such as Flipkart and Amazon are challenging incumbents in this space. What is your assessment of these challenges?
A. There will always be challenges and in the current day there is going to be disruption in almost every category. For individual companies and for leaders in a category to handle this disruption, they have to be agile and well prepared. One has to evaluate category by category how the leaders are behaving and whether they have strong advantage. Many of these companies have an edge over others, whether it is a brand advantage, cost advantage, or their distribution reach. How do they use them and tackle these disruptions or challenges is the key question. There are many companies which are at the forefront and performing very well in their respective category. So that’s why one still has enough opportunities though disruption in some specific categories is bound to happen.
Q. You have chosen the Nifty 200 as the benchmark rather than the Nifty India Consumption index. So why select a general benchmark rather than a sector one?
A. The consumption fund for which we have the NFO, will cover what we call as B2C companies i.e. companies which have a business to consumer model. They are catering to small individual customers / households. This includes auto, consumer durables, retail, media, retail financial, insurance companies, mutual funds, cement, paints, building materials, retail gas utilities, one or two digital companies and so on. So it is actually a host of sectors and not restricted just to consumer durables or pure consumer goods as such. Nearly half of the companies in the Nifty 200 would have a B2C business model. That way, the Nifty 200 is a far more representative and a broad based index than just a consumer factor index.
Q. Small caps have corrected significantly this year. Is there a market cap bias that the fund will follow?
A. This fund is market cap agnostic. And we intend to invest in companies across the sectors which fit the B2C criteria. So there are quite a few companies or categories where the leaders themselves are small cap or midcap by definition. That is why even if you are looking at a leader who is doing very well in a growing category, just because by market capitalisation they might still appear as a mid cap or small cap that should not be a restriction for the consumption theme as such. That is why the fund is a flexicap fund where we will have exposure to mid, small and large cap, a mix of all three categories.
Date: 21 AUG 2018