Pre-COVID Consumer Stocks Entered Powerplay Phase, Now Requires Patience in Middle Overs

India's Consumption Story: Beyond the Cyclical Slowdown

The narrative surrounding India's consumption story has been one of a powerplay, with high returns and easy boundaries. However, the last five years have been different, with returns disappointing and the bears calling the match. Despite this, investors need to discern luck from competence and a powerplay from an innings.

The 2010s saw a decade of fiscal stimulus followed by a commodity downcycle, creating artificial tailwinds that produced 15-18% revenue and expanding margin algorithms. Two key factors contributed to this: fiscal indiscipline, with transfer-led consumption support schemes worth Rs 39,000 crore/year, and a commodity cycle downturn, with Brent oil prices crashing from $111/bbl to $44 and staying sub-$71 through 2019.

Comparison of Revenue and Margin Growth

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These artificial tailwinds created an exceptionally easy environment for consumer-facing businesses. However, the combination of fiscal stimulus and commodity cycle downturn was never sustainable and has faded.

The long-term Indian consumption story is fundamentally about rising per-capita incomes and the gradual movement of hundreds of millions of lower-income Indians into the middle class over the coming decades. Even if India eventually reaches just 50% middle-class penetration, it would more than double the size of its current middle class.

Capex and Structural Reforms

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Central government capex grew more than five-fold, from Rs 1.96 lakh crore in FY15 to Rs 11.11 lakh crore in FY25, rising from roughly 1.5% to 3.4% of GDP. Alongside, structural reforms such as financial inclusion, taxation, the bankruptcy code, banking-sector clean-up, digitization, and manufacturing incentives through PLI schemes have been implemented.

The chain is simple: capex builds productive capacity, productive capacity creates jobs, jobs create incomes, and incomes build the middle class. Handouts deliver spike demand, while jobs deliver durable demand.

Valuations and Flows

A meaningful part of the underperformance in consumption stocks stems from valuations becoming excessively stretched during COVID. The valuation expansion of 2020-2021 was extraordinary, with P/E multiples across the consumption universe rerating sharply within a short span of time. However, P/E multiples for the median company are now roughly 30% below their COVID-era peaks, with most stocks trading at or near pre-COVID valuation levels.

Indian equity ownership has rotated from foreign to domestic hands, with SIP inflows scaling 10.3x in a decade. These SIP flows are providing a structural floor under Indian equities, with the evidence clear: the 2024-26 FII outflow was 5x the COVID outflow, and drawdown was half.

Conclusion

The powerplay is over, and the bowlers have found their length. The field has spread, the run rate has slowed, and the non-believers have written their obituaries. However, this is where big innings get built – not in the first six overs, but in the middle, when the patient batsmen accumulate while the impatient ones walk back to the pavilion.

Stay at the crease – the big totals come from here.