Ten myths about Indian consumer

Some investors believe that the ‘Big India consumption story’ is well understood and well discounted in stock valuations. In this report, we address a few oft-repeated myths about the Indian consumer:

(i) How much penetration-led opportunity is really there? (ii) Is uptrading possible in all categories? (iii) Does size advantage really exist? (iv) Is distribution growth unlimited? (v) How widely is it understood that 10-25% of profits of many consumer companies come from ‘other income’ (see this in conjunction with the high valuations)? (vi) Is it really correct to compare India with other emerging markets/countries? (vii) India is an attractive market for multinational companies; however, it appears to be less so for domestic consumer companies. (viii) Most consumer companies have either single-product or single-category exposure. (ix) Can processed foods ever be big in India? (x) Are Indian consumers brand–conscious (enough)?

Our sector-positive view stays: A confluence of tailwinds in 2012 has driven sector valuations to a multi-year high. While the growth outlook and investment argument remain compelling, stock selection will be the key from here on. Indian consumer companies have multiple levers to manage growth—strong pricing power, benefits of distribution expansion and ability to expand, and increasing innovation to manoeuvre their way out of potential slowdowns. Our top Buys are ITC, Titan and United Spirits; Dabur and Nestle are our top Sells.

Select companies have the firepower to counter a slowdown: While macro risks of high inflation and

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