market strategy: Travel, tourism and food sectors poised for growth amidst broader consumption slump: Rohit Agarwal

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market strategy: Travel, tourism and food sectors poised for growth amidst broader consumption slump: Rohit Agarwal
“Within consumption, people have slowed down on the staples kind of consumption, but they have still, at least in the last quarter, continued to do discretionary consumption,” says Rohit Agarwal, Kotak Mahindra.

And today we will be talking about the consumption space because given the fact that you are seeing a slowdown in urban consumption, once upon a time you had talks about rural consumption being under pressure but now that weakness has actually creeped into the urban consumption as well and how should one actually look at the space?
Rohit Agarwal: Well, as you very rightly said that maybe for the last seven to eight quarters we were talking about weakness in rural consumption, but in the last two to three quarters we have heard or seen a decisive slowdown in urban consumption.Well, we have to first understand why urban consumption has slowed down. If you look at the companies that have reported numbers and what they are saying, they are saying that there is less earnings for non-salaried urban versus the inflation, which essentially means that the earnings growth or the income growth for urban non-salaried is lesser than inflation, that has meant that there is slowdown in consumption. Within consumption itself, if we look, there is a very-very broad or very-very different approaches to consumption that people have taken.

Within consumption, people have slowed down on the staples kind of consumption, but they have still, at least in the last quarter, continued to do discretionary consumption. As late as yesterday and the day before, people have continued to flog on to the concerts, but they have decided not to buy soaps and the shampoos.

Just because there has been a slowdown in the earnings, it has led to urban slowdown in consumption and the inflation is higher for urban side of the people where especially housing rent, if we look at the data suggest that, which is forming the highest component of the inflation itself, that seems to be indispensable and hence the consumption is more pronounced in the short term right now. So, two ways this can get corrected, either the income levels go up or the inflation on the rent side on the housing, or some of the other items start to come down.

You made a very interesting point there that the people are not going ahead to buy soaps. But yes, we are seeing a lot of discretionary spends where we are going out for concerts, we are actually going in for those staycations, we are travelling when it comes to a lot of other, like you have the Maha Kumbh as well, so you have a lot of them travelling for that as well. But when you talk about betting on these sectors because given the fact that it is a very vast segment, consumption space is a vast segment, how should one look at it while actually picking the stocks or the subsegments in consumption space?
Rohit Agarwal: So, what is there clearly is that there is slowdown in urban consumption. At the same time, it is not that rural consumption is rocketing. Rural consumption, which was declining or was in a pretty weak phase for the last two years or so, has kind of stabilised, that does not mean that it is growing very well. So, overall, if I have to include both, consumption is in the slow lane. Hence, it is going to be pretty difficult for people to make a lot of money in the consumption basket as a whole because urban as well as rural has kind of slowed down. The way out is higher incomes or lower inflation.

How to position portfolios is again, in my opinion, a case of a barbell strategy, where if you look at the staple kind of companies, they have underperformed quite a bit in the last one to two years.

You could invest in a few staple companies, at the same time as we rightly just discussed that on the discretionary side, there is still a lot of demand and there is still a lot of consumption happening. So, we will have to very minutely, astutely choose segments within consumption which we want to bet on.

One side, as I said, we are going out to Maha Kumbh, we are going out to concerts, all the spends related to those which are more to do with food, fast food, they are starting to come back. But as I said, the core real staples is still struggling and obviously, there is impact of quick commerce on a lot of other companies which are listed, some of the quick commerce are not listed, some are.

All of that put together, consumption as a basket is not something which should be a big overweight in portfolios simply because we are in for some kind of a tough time in terms of consumption going forward.

Should one actually plays their strategy given the fact that the outlook also is not looking that good when you talk about the consumption space. I remember that when you had the government elected in the month of June, you saw a sharp spike in this FMCG plays, and everyone was betting that yes, now these are the sectors that one should watch out for, that sort of conviction has not held. You have seen what has happened in the entire FMCG space or the consumption space as a whole. So, now how should one place their bets? What sort of a strategy should one use while placing bets? And also, should they actually venture into the consumption space right now or just hold on to it?
Rohit Agarwal: I think one should not try to be very adventurous in this space, simply because going into the budget, there is some expectation that there may be some tax rate changes in some of their tax rate slabs.

Having said that, they will not spur on consumption to a very large extent, simply because when you are talking about the tax brackets that we think there may be some tinkering, that is not a very large section of the population. Well, three to four crores Indians pay taxes.

Out of that, if you take that segment that you are talking about, tax rate cuts is still very minuscule. So, we should not be too optimistic that there will be a great consumption boom. See, what is happening is that most of the states have decided to shift their capex pattern to consumption pattern in a very sensitive way, in the sense that there have been so many schemes of direct benefit transfer by the states, which is leading to consumption but that consumption is very different, that consumption is at the very-very low end. Money is going there.

But at the same time, the states are not able to now spend on capex. Now, capex also relates to consumption because when capex happens in the economy, it is a GDP multiplier, the highest GDP multiplier, which eventually also leads to consumption.

So, we are in that phase where it is very difficult to get out of it, unless, of course, we see loosening and now let us not forget, a lot of it can also be attributed to what has happened on the MFI side, the microfinance, that is, the unsecured personal loans, and also to some extent credit card.

In all of these segments, which are unsecured, the Reserve Bank has been not very comfortable in the ways the lending was happening. And if we see in the last one year or so, there has been slowdown orchestrated by the Reserve Bank itself for the lenders to go slow on that segment because the RBI believe that there is excesses in the system, there is excess leverage in the system.

All of that needs to eventually come down for the system to get more sound. I think in the next two quarters or so, we will get there, where the central bank might get more comfortable because MFI might come back and the stress might be coming to an end. Even the unsecured personal loan, there where this leverage was very high is starting to come down.

And even in credit card, where the delinquencies had shot up, we get to hear from the lenders that they have kind of reached a plateau in terms of incremental slippages. Now if these three start to give confidence to the central bank, they will obviously at some point start to go a little soft on all these segments and then the credit flow to the economy from these three segments will start to grow again which will obviously lead to consumption that we are talking about. And at the same time, if inflation comes down, that is our best bet to play in consumption.

So, let me actually break it down and try and get some more stock specific or sector specific details from you then because you know, the consumer discretionary area is pretty vast, the consumer staples side is vast, you would bet on discretionary versus the staples and if it is discretionary, if that sort of a theory is true then, which sub-segments will you bet on? Will it be an auto sector that you will look at, will it be the travel sector that you will look at, given the fact that all these are actually seeing a more of consumer spending than your soaps and detergents?
Rohit Agarwal: Within that, travel and tourism is certainly something that we look at very favourably because if you look at Indian, the countries spend on travel and tourism, India gets about one crore visitors a year. But more than that is the domestic tourism itself and within domestic tourism, religious tourism is picking up in a big way. If you look at India’s religious tourism 5 years or 10 years back, even though tourism was happening, but there was a lack of best of facilities, hotels, restaurants in all of those religious places.

In the last five years or so, a lot of that has got addressed and you see a lot more inclusive definition or inclusive travel happening within India and that makes us pretty bullish on travel and tourism, even some food related, some fast food related, and of course, the whole space of delivery, where you have seen some of the companies report numbers and the market is not liking them because there is a lot of competition.

But at the end of the day, as a space, they are growing the market and they are catering to the needs of the market and certainly, within consumption, we would want to play more discretionary as travel and tourism is one of them.
Food is also one of them. And in some cases, some discretionary, even hotels, if you look at the ARRs, if you look at the occupancy, all of that within India has been pretty sound, pretty good, even though the incoming traffic from foreigners after COVID has not yet surpassed the pre-COVID level.

The ARRs, the EBITDAs, all of that, that the hotels are generating is pretty good, that is because now we have a very buoyant domestic travel, be it religious, be it leisure, be it staycation, and all of that.

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