Coping with changes and challenges amid economic growth By Investing.com

Morgan Stanley (NYSE:)’s latest analysis paints a nuanced picture of the Indian consumer industry, revising their view from “attractive” to “in-line”. Despite favorable GDP growth prospects driven by cyclical businesses, defensive consumer sectors are expected to lag due to increased competition and changing consumer behavior.

The report highlights several key factors contributing to this change. Competition in the household products (HPC) sector is expected to intensify depending on price, product, and distribution strategy. This, combined with low growth expectations and rich valuations, is likely to lead to a devaluation of the consumer goods sector.

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Ridham Desai, India equity market strategist at Morgan Stanley, highlights the continued upward cycle of the Indian economy. However, this upward cycle poses challenges for major stocks, with cyclical spending outpacing defensive spending. The outlook is for GDP growth of 6.8% and 6.5% in FY25 and FY26 respectively, driven by a rebound in capital expenditure.

In the context of this cyclical rise, consumer staples companies are expected to underperform due to their defensive nature. A similar trend was observed in the 2003-07 cycle, with major stocks lagging significantly as the economy gained momentum.

Consumption remains a pillar of India’s economic growth, but the post-pandemic recovery has been uneven, especially in rural areas. Factors including the shift to services, a slow recovery in rural demand, and ongoing adjustments to household budgets contribute to this mixed growth outlook.

However, there is optimism that consumption growth will gradually recover, driven by factors such as easing inflation, rural sector resilience and improving labor market conditions. This is consistent with India’s long-term consumption story outlined in Morgan Stanley’s BluePaper, which predicts continued consumption growth and a shift towards discretionary spending as income levels rise.

While challenges persist in the consumer sector, India’s consumption narrative remains intact and poised to grow as the economy develops and consumer preferences change. Morgan Stanley’s analysis provides valuable insights to investors navigating the dynamic landscape of the Indian consumer industry.

Here are consumer stocks that investors should watch out for due to overvaluation:

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Dabur India (NS:) – This stock has delivered a poor return of 7.3% over the past year, but nonetheless appears to be overvalued by 6.8%. Even the 39 analysts covering this counter are not too optimistic, giving a slight upside to INR 597.

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Hindustan unilever (theory:) (NS:) was another poor performer, posting a one-year return of -8.43%. ProTips throws up numerous red flags on the valuation front and after analyzing the stock across 14 different financial models, its fair value is overvalued by 6.4% at INR 2,214.

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Also Read: Driving Growth: Insights into India’s Auto Dealership Landscape

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