A Global Portfolio To Ride The Consumption Boom

Asian countries are fast climbing on to the 'shop till you drop' consumerist bandwagon that their hitherto conservative spending mindset stayed at arm's length from. Higher disposable incomes and favourable demographics are gradually creating a spending boom, particularly on the discretionary spending front, which is taking the Asian markets into a new growth trajectory. Vikas Gattani gives you a international perspective on the subject and Team DSIJ tells you how you can make the most of this wave on the domestic front.

Economies have evolved, transformed, boomed and busted. If innovation was the core of growth of ancient economies, the more modern times have seen the evolution and rise of the consumer as a major driving force. This has been truer in the context of the Asian region, whose emergence as the next big economic superpower has been talked about for almost two decades now.

Asia, and especially China, has been dubbed as the factory to the world and also its export house, given its predominance in manufacturing. The ability to produce, and to produce efficiently and at a much cheaper price has been supporting Asia’s claim to power. The model, propagated by Japan initially in the 60s and 70s, was copied by South Korea followed by South East Asia and then China. Reliance on cheap labour, improved technology, falling transportation costs and globalisation helped this model to succeed immensely.

But manufacturing is one part of the story. Unless there is a consumer to buy and use what you produce, no manufacturing initiative can ever succeed. Going by this fairly straight-forward logic, it is indeed the strength of the Asian consumer has led to the growth of the economies here.

Here are some simple statistics that shed light on the role that the consumer plays in the overall Asian economic scenario. Almost 50 per cent of the world’s population of 7.2 billion is in Asia, with the Asian population currently pegged to be around 3.3 billion. Excluding China with 1.3 billion people and India with 1.2 billion people, ASEAN’s combined population stands at around 600 million. This is larger than the US population of 320 million and Europe’s number of 490 million.

What do these numbers really mean? Well, the sheer size of populations tells you the opportunity that awaits businesses in serving them. But are the numbers alone reason enough, and will they necessarily precipitate into an economic boom? Well, here is some more food for thought which will answer the critical question of why the consumer will lead the economic boom.

The spending patterns of consumers have undergone a sea change today. The large base of Asian consumers is spending or rather splurging in a big way. So, what is it that is suddenly leading the Asian consumer to this predilection for spending?

Empirical studies have shown that at the point when the GDP per capita of a country hits USD 2500, the demand for basic necessities is well taken care of and spending on consumer goods spurts. In other words, USD 2500 per capita is the sweet spot when middle income group consumption takes off. Most major economies of Asia, with the exception of India, now have a GDP per capita in excess of USD 2500 (See Table: Per Capita GDP Of Asian Economies (2012)).

Rising income levels, easier availability of credit, financial disintermediation and rising aspirational levels of the population all transform a country reliant on manufacturing to one that starts relying on the consumer. The US economy is regarded as a consumer driven society, with about 70 per cent of that economy related to consumption. The same is now happening in Asia as well. Additionally, the policy bias in a number of Asian economies, particularly China, is moving from an over-dependance on export and infrastructure investment-led growth to count on domestic consumption for growth.

Here are some numbers that clearly spell out the consumption boom to come. According to a study by Brookings Institution (a policy think tank based in Washington DC), Asian middle class consumption spend, which was estimated at around USD 4.9 trillion in 2009, is expected to go up to USD 14.8 trillion (up 3 times) by 2020 and upto USD 32.5 trillion (up 6.5 times) by 2030.

In fact, the world is in the throes of a major expansion of the middle class itself, particularly in emerging Asia. The global middle class is expected to grow from under two billion consumers today to nearly five billion within two decades. As a share of global middle class consumption, Asia’s 23 per cent in 2009 is expected to almost double to 42 per cent by 2020 and triple to 60 per cent by 2030. These are astronomical numbers by any stretch of imagination, but stand true today. The middle class is a key driver of growth, as the income elasticity, particularly for durable goods and services, for this class of consumers is greater than 1.

China and India are at the forefront of this expansion. The world economy can be expected to increasingly rely on the middle class population of these two Asian powers as key sources of global demand (See Table: Middle Class Consumption).

Such secular growth stories happen only once in a while and one should look at generating multi-fold investment returns from them.

Where To Invest?

Talks are rife about increased spending by the young middle class people on items from tablets, smart phones to branded bags and apparel. This is a theme which is not only prevalent in India but is even more pronounced in other parts like China, Indonesia, Thailand, and Vietnam in the pan Asian context.

Before we get to the opportunities that await investors on the domestic front, let’s pull back and look at a slightly larger picture. By this we mean the opportunities that lie even outside of India from investors’ perspective. 

An analysis by Progress Capital, (a ‘Registered Fund Manager’ registered under MAS, Singapore and involved in Funds Management and Independent Asset Management (IAM) primarily in the Asia-Pacific (ex-Japan) region), shows that a portfolio having the top 50 consumption-related stocks by market cap (i.e. no stock selection bias) would have gone up by an incredible 16x over the past 10 years and 4.5x in the past seven years.

So, if one had invested USD 1 million in 2003 in these 50 equally weighted stocks, the portfolio would currently be worth more than USD 16 million. This is despite intervening periods of extreme volatility, like the 2008 global financial crisis.

More importantly, such a portfolio would have outperformed the MSCI Asia (ex-Japan) by a very wide margin over the last 15 years, as can be seen from the chart here. One should also note that such a basket has recovered much faster from crisis periods and outperformed strongly in post-crisis periods.

Investors in pursuit of emerging markets’ consumer growth inadvertently do not benefit from buying in these benchmark indices which have relatively very low weightings in the consumer sector.

Investment is not the dominant theme only in the emerging markets index, but also in 16 out of 21 emerging market country indices which constitute the Emerging Markets MSCI Index including China and India. In fact, in 11 out of the 16 such country indices, the investment sector represents over 50 per cent of total market-cap weighting of the country.

What this means is that in order to benefit from the consumer-led growth story, investors ought to structure the options which can get them more out of this boom. Investing in plain vanilla area-denominated index funds could lead to losing out on the real opportunity that lies ahead.
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Let’s take a look at some of the Asian consumer stocks which will benefit from this rise in consumer spending

Samsonite

Samsonite International SA designs, manufactures and distributes luggage. The company’s products include suitcases, garment bags, casual bags, business cases, clothing, shoes and accessories. Samsonite also licenses its trademarks for use on products such as travel accessories, leather goods, handbags, clothing and furniture. The stock trades at a forward PE of 16.2x and has a two-year earnings growth of 22.7 per cent.

NagaCorp

NagaCorp is a leisure and tourism company with casino operations in Phnom Penh, the capital of Cambodia. The company offers hotel accommodation, food and beverage outlets, recreational facilities, entertainment and retail operations, and also develops properties. NagaCorp is listed on the HK Exchange, trades at a forward PE of 11.8x and has a two-year earnings growth of 15 per cent.

Unilever

PT Unilever Indonesia, a subsidiary of Unilever, manufactures soaps, detergents, margarine, oil and dairy-based foods, tea-based beverages, ice cream and cosmetics. It serves the Indonesian market, a rapidly developing economy of 250 million people, with one of the highest per capita income in the ASEAN region.

Super Group

Super Group manufactures, packages and distributes instant cereal flakes, instant beverages, instant coffee powder and other convenience food products. The company also provides vending machine services. The stock trades at a forward PE of 24x and has a two-year earnings growth of 25 per cent.

Thai Beverage

Thai Beverage Public Company produces a wide range of branded beer and spirits in Thailand. Its stock trades at a forward PE of 17x and has a two-year earnings growth of 20 per cent.

Matahari

PT Matahari Department Store Tbkis is engaged in the retail business for several types of products including clothes, accessories, bags, shoes, cosmetics, household appliances and management consulting services. The stock trades at a forward PE of 24.2x and has a two-year earn- ings growth of 43 per cent.
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The Indian Context

The impact of consumption-led growth has been more starkly evident in India than anywhere else in the world. A favourable demography, with a population that is quite young and has increasing disposable incomes has been at the core of this story. Other immediate factors that will help boost consumerism in the Indian context, at least over the short-to-medium term include:

A Normal Monsoon

The country witnessed better foodgrain production in the ongoing rabi season, which will surpass the target production of 125.5 million tonnes by 1.5 per cent. The south-west monsoon is also slated to be normal, which is bound to increase farm productivity this year. This helps FMCG companies in two ways. First, higher productivity will lead to stable or lower prices of agricultural products, which will help companies to lower the cost of goods sold. This will help them to expand their margins, and the savings can be utilised to up the advertisements and promotions, which will further drive demand for the products. Secondly, rural consumption, which forms almost 35 percent of the total consumption of these products, will also see demand picking up after better farm productivity.

Impending Elections, Rise In Government Spending

There are 10 elections that are scheduled to take place in the country over the next one year or so, including the general elections. Past experience shows that government expenditure tends to rise in a pre-election year. For example, in the past three general elections (1999, 2004 and 2009), the average increase in government expenditure has been to the tune of 20 per cent on a yearly basis. With government spending account for 15-18 per cent of the GDP, even a 10 per cent increase is likely to pour a lot of money into the system. This effectively means more money in the hands of consumers, which will definitely drive the consumption cycle.

Government Initiatives

Another important factor that will boost consumer-led growth is the government’s initiative of putting money directly into the hands of the consumer. The Direct Cash Transfer (DTC) Scheme initiated by the Government
of India at the start 2013 may be a game changer for the consumption-based companies. It is estimated that the scheme will cover more than 20 welfare schemes of `3.2 lakh crore will Source: Progress Capital be directly transferred to the concerned benificiaries. According to some estimates, only 20 per cent of ther total subsidies used to reach the targeted individuals earlier. Now, with better technology being put to use and more stringent control over pilferage, leakage and wastage (using Adhar card), more cash will find its way to individuals. This will certainly spur higher consumption of various products falling within the discretionary spending category. 
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What To Do

Having built a strong case for how consumption-led growth is all but going to be a reality even in the Indian context, here are some solid investible ideas to benefit from this impending boom. Among the sectors that have the potential to benefit the most out of this boom in consumerism in the Indian context are FMCG, Consumer Durables and Lifestyle.

FMCG 

According to the McKinsey Global Institute, India’s consumer sector will become the world’s fifth largest in revenue terms by FY25. Growth will be driven by the large urban middle class as well as the rural population.

According to another report by the Confederation of Indian Industries (CII) and Booz and Allen, most of the India's consumption will come from the under-penetrated rural areas. Although nearly 69 per cent of the Indian population resides in the rural areas, their share of consumption is just 50 per cent. Therefore, the next wave of growth in FMCG companies will come from higher penetration as well as higher intensity of use from rural areas. This will be aided by better supply chain and distribution networks.

Consumer Durables

Another sector that will benefit from the growth in consumption is consumer durables. This sector is divided into two segments, viz. White goods and Brown goods. White goods include products like washing machines, refrigerators, air conditioners, cleaning equipments, microwaves and fans, while Brown goods include TVs, CD/DVD players, laptops, computers, camcorders, etc. There are many growth drivers for both these segments. Factors like higher real disposable incomes, easy consumer credit and a growing user base will fuel demand for these goods. While these are the primary drivers, other policy-led initiatives such as sops favourable to the FDI climate will act as secondary sentiment boosters.

A combination of these factors has lead to companies expanding their production and distribution facilities in India and broad basing research and development activities. All in all, this sector too is likely to ride on the consumer-led boom going forward.

Lifestyle

Rising disposable incomes fuel the aspirations of the population, and consequently, the demand for lifestyle products. We feel that this trend is here to stay and this is the reason why companies in this segment will remain on investors’ radar. The fast paced lifestyle of the modern young population will be a good encashing point for companies in this sector. 

We present to you a set of companies from these sectors, which we believe are well placed to ride the consumer driven demand boom and will thus fare well going forward.

"The Indian consumption story is driven by the youth. We are presently in the segment of fashion and lifestyle and our recent acquisition of Pantaloon has only made our presence stronger. We believe that strong growth will be seen in the Indian retail sector, and with the 1443 outlets that we have across 3.7 million square feet, we are trying to make the most of the opportunity offered." Sushil Agarwal, Whole Time Director & CFO, Aditya Birla Nuvo
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Stock Recommendations

GCPL 

Godrej Consumer  Products (GCPL), which  is a market leader in hair  care and home care products in India and also has strong brand recognition through brands like  Good Knight, HIT, Cinthol and Godrej No.1, is a perfect example of strong consumption growth in India. Its strategy of 3x3 (three product categories in three different regions) is paying off returns now. The group is now applying a 10x10 strategy (i.e. growing its topline 10 times in 10 years). 

ITC

ITC dominates the white cigarette segment in India. The growth in the tobacco segment of the company will be driven by rising incomes and affinity for western-style consumption, trading up from other forms of tobacco. The FMCG segment of the company has started contributing in a bigger way to the topline, and the losses from this segment should decline as the company scales up. Moreover, some categories like instant noodles are doing well, in which ITC has taken a market share of nine per cent over the past two years.

Jubilant Foodworks

Jubilant Foodworks operates pizza stores under the brand name ‘Domino’s Pizza’ in India, Sri Lanka, Bangladesh and Nepal. The company has plans to open outlets of the ‘Dunkin’ Donuts’ restaurant across India. India’s increased per capita income and changing lifestyles have changed the food habits of Indians, which will go in favour of companies like Jubilant. With a considerable pres- ence across metros and Tier I cities further store additions in untapped market would be a positive trigger in the next couple of years.

Tata Global Beverages 

Tata Global Beverages is an emerging player in the global beverages market. It has managed to make a strategic shift from being a local tea company to a global beverage company through various acquisitions and strategic partnerships with global beverage giants like PepsiCo and Starbucks. As a result, the company has broken into the list of top 10 global companies in the hot drinks category. Its product portfolio comprises leading global brands like Tetley and Eight O’ Clock as well as well entrenched local brands like Tata Tea. We feel that with a global canvas and local expertise, this company is a strong player in the Indian consumption story. 

Pidilite Industries

Innovation has always been at the core of Pidilite Industries, helping it generate high volume growth. A strong management bandwidth, innovative product development and strong penetration in the rural markets are expected to be prime growth drivers for the company over the next three-five years.

Havells India 

Havells India is a USD 1.3 billion Fast Moving Electrical Goods company. With rising penetration of electric supply in rural India along with increased disposable incomes, the demand for its goods is set to increase. Further, Havells’ acquisition of Sylvania will start generating strong business growth. A combination of these factors would help it witness strong growth. 

Britannia Industries 

After opening factories in Orissa and Bihar, Britannia has planned to start a new factory at Jhagadiya, Gujarat in FY14. This would bring down the lead distance from the focused market to 100-150 km, thereby reducing the distribution cost. The company is now entering into new sub-segments such as digestive biscuits, which will add further value to its product portfolio. 
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Agro Tech Foods

With changing lifestyles and the Indian population getting increasingly health conscious, brands like Sundrop in the edible oil segment is likely to witness better acceptability going forward. Looking at the better acceptability for its products, the company plans to set up four factories in India in the next three years, which indicates towards the growth potential.

Hindustan Unilever 

Hindustan Unilever (HUL) remains one of the most dominant FMCG names in India, with long-standing dominance in most of the categories it is present in. The company has variety of products in different categories which should provide it the ability to grow in volume and value terms in future. 

United Spirits

United Spirits is the leading brand in the Indian liquor industry. The growth in the young population in the country and the shift towards branded liquor will benefit this company in the future. Recently, there has also been a change in the management which will benefit the company.

About Vikas Gattani 

Vikas Gattani is the founder and CEO of Progress Capital, a fund management and independent asset management house that was set up in 2007 and is a registered fund management company under MAS, Singapore. Vikas has a wealth of investment experience across a range of asset classes spanning equities/fixed income/currency/commodities and the real estate sector in global markets. Progress Capital has launched several unique and investor-friendly investment products to cater to needs of high net worth clients of private banks and other independent asset managers. 

Vikas is a Mechanical Engineer from the University of Mumbai and an alumnus of IIM, Ahmedabad. Having begun his career in 1990 in Project Finance with ICICI, Vikas is a seasoned financial industry veteran with over 23 years of experience in capital markets in Asia, Australia and India. He has been involved in trading and investment management in  the Asia Pacific financial markets for several years. Formerly the CIO of the internal hedge fund group of JP Morgan Securities, Asia, he has also formerly run the Asian Proprietary Investments group at Merrill Lynch, Hong Kong.