Mr. Himanshu Nayyar, Lead Analyst – Institutional Equities, YES SECURITIES views on Consumer Staples and Discretionary Sector

Consumer Staples and Discretionary in 2020

The consumption space has shown strong resilience in terms of the impact and recovery post the COVID-induced lockdowns. While staples companies were the least impacted by the supply chain disruptions coming up with innovative solutions to reach the consumers as soon as the manufacturing operations were restored, discretionary consumption categories saw a more lasting impact with direct closure and restrictions on store operations.

It also needs to be noted that the companies went into the lockdown with already weak growth trends and utilized this difficult period to correct their channel inventories, identify and cut down on avoidable discretionary costs and worked hard on supply chain efficiencies. Categories that outperformed were foods and beverages, OTC FMCG Products, oral care, hair care and paints while categories like QSR, footwear, liquor, apparel and retail were impacted the most.

The divergence in growth rates for these set of companies was quite significant in both 4QFY20 and 1QFY21, but this gap has narrowed sequentially with discretionary demand picking up and essentials demand moderating a bit. Key outperformers during this period were Dabur, Britannia, Asian Paints, Berger Paints, GCPL, Radico, Emami and Nestle while companies like ITC, Bajaj Consumer, Titan, ABFRL, Trent, Jubilant Foods, Westlife, United Spirits, United Breweries were the key underperformers in terms of growth. While most staples stocks have delivered steady stock returns, even these leading discretionary stocks have given strong stock returns since their Mar/Apr lows seeing the strong sequential recovery being set in motion in addition to the narrative of structural market share gains and cost efficiencies.

2021 Outlook: Staples to see continued resilience while discretionary consumption to start 2021 on a strong note

Going forward into 2021, we expect staples demand to remain steady with some moderation in packaged food and hygiene products demand to be offset by better trends in discretionary FMCG categories especially driven by continued tailwinds in rural FMCG markets and strong traction in winter portfolio. Our top picks in the staples space for 2021 would be HUL, Tata Consumer, Marico and Emami.

On the discretionary side, we expect complete normalization of demand for 4QFY21 for most categories. We would prefer to stick with the leading franchisees in various categories who are well placed to gain market share from unorganized/local players and are in categories with low ticket consumption items.

Our top picks for 2021 would be Asian Paints, Avenue Sipermarts, United Spirits, Relaxo, Page Industries, Radico, Trent, ABFRL and V-Mart.