In the consumption theme, Siddhant Chhabria, Fund Manager at Mirae Asset Investment Manager, says he is overweight consumer discretionary, new-age and building materials. “We are also bullish on real estate upcycle and believe building materials is the best proxy to play the upcycle. New age businesses provide a longer runway for growth and most of these companies are now pivoting towards profitability,” he says. Edited excerpts from a chat:

What are your key observations from the Household Consumption Expenditure Survey, especially given there has been a slowdown in the sector?
Siddhant Chhabria: As per the Household Consumption Expenditure Survey 2012-23, there are 3 key takeaways:Real consumption growth moderated to 8.8% CAGR in 2012-23 from 13.3% CAGR in 2005-12. Consumption growth is linked to GDP growth which itself has moderated from 7.3% in FY2005-12 to 5.7% in FY2012-23, primarily due to the Covid shock. Still, the share of consumption within GDP rose from 56.2% in FY12 to 58.5% in FY23.

Rural consumption grew faster in the last decade. Rural spends grew by 9.2% CAGR vs urban at 8.5% CAGR. While the absolute level of spend of urban India is higher, rural India’s spending has grown faster in the last decade. This has narrowed the gap in the rural-urban spending.

Significant shift in consumption basket is visible. A rise in income levels led to faster growth in discretionary items (as compared to food) and products up the value chain. Share of foods for rural/urban has declined from 59.4%/48.1% in 1999-2000 to 46.4%/39.2% in 2022-23.

Consumption is a broad segment. What part of it are you actively investing in?
Siddhant Chhabria: In the consumption theme, we are overweight consumer discretionary, new age and building materials. India recently surpassed $2,000 per capita which has been an inflection point for acceleration in discretionary demand as the basic needs are already met. While discretionary demand has been weak in the last 1 year we do expect a recovery over the next few quarters. We are also bullish on real estate upcycle and believe building materials is the best proxy to play the upcycle. New age businesses provide a longer runway for growth and most of these companies are now pivoting towards profitability. What have been the key trends in consumer sector post Covid?
Siddhant Chhabria: One clear trend that is visible is K-shaped pattern of recovery in consumption, wherein consumption of upper middle class consumers is growing at a fast pace while lower middle class is grappling with inflation. As a result, demand for luxury and premium products has been robust while mass products are yet to fully recover from covid shock. Hence, we are yet to see a broad-based recovery in consumption after Covid.

Consumption as a theme is present in most diversified equity funds. Why should an investor consider investing separately in a consumption fund?
Siddhant Chhabria: Consumption is one of the most attractive investment opportunities in India. It is a secular story and key drivers of the theme are: 1) India has the best demographic dividend. India’s Median age population is only 28yrs and 2/3rd of population <35yrs. Working age population is growing and will peak only after 2 decades while it has already peaked for the world. 2) ~35% reside in Urban India as compared to >50% globally and 3) Middle class comprises ~20% of total HHs in India and this is expected to double to >40% over the next decade. The sector has not only outperformed the markets over the last decade but has also witnessed lower volatility vs broader markets. Also, in any diversified fund the weight of the consumption sector in aggregate will not be meaningful (<20%) to play the theme.

How do you see consumer discretionary firms performing in the long term?
Siddhant Chhabria: The recent slowdown is transitory in our view which was driven by end of pent-up demand and inflation led headwinds. There has also been a wallet share shift towards services like travel/hospitality. We expect consumption pickup in the next few quarters as the inflationary headwinds recede and likely cut in interest rates. While the timing of near term pickup can not be predicted, the structural drivers like favourable demographics, higher per capita income, urbanisation are intact, which provides long term growth visibility.