Consumption Downturn Is Here, Says This Market Analyst; Adds Earnings Recovery Unlikely Soon

The nation is firmly in a cyclical downturn, according to Abhay Agarwal, managing director of Piper Serica Advisors, as he sounded the alarm on India's consumption landscape.

Agarwal attributed this downturn to a range of factors, from post-Covid demand saturation to tightened credit access, and forecasted that any earnings recovery is still a way off.

"Post-Covid, we saw demand surge as consumers were eager, and credit was flowing freely," Agarwal told NDTV Profit. "But with the RBI tightening credit, demand has waned, and inventory has started to pile up. This downturn will take another two quarters to resolve."

This tough landscape, Agarwal argued, has capped near-term upside potential in the markets, pointing out that the current earnings season has revealed missed expectations and weaker consumer sentiment, even from some major Nifty companies.

Agarwal pointed to underwhelming earnings from consumer-driven names like Britannia Industries Ltd. and Oil & Natural Gas Corp. "We're currently trading at 20–21 times earnings, but if you adjust for recent misses and assume earnings growth remains tepid, then paying a 20x multiple becomes questionable," he added.

The market's lack of earnings growth and weakening consumer sentiment makes it unlikely that the Nifty will see significant gains in the next six months, he said.

Agarwal's concerns extend across specific industry sectors, with autos, discretionary consumption, and microfinance drawing particular criticism. He observed that the automotive sector is seeing its inventory levels surge, potentially impacting earnings in upcoming quarters as dispatches slow to adjust for bloated dealer stocks. This, he noted, includes both consumer and commercial vehicles, with two-wheelers struggling notably.

"Inventory buildup in auto numbers will really hit next quarter when dispatches slow because dealers are already sitting on stock," he said. He warned that a similar challenge looms over the discretionary consumer goods sector, specifically pointing out categories like paints, tiles, and consumer electronics.

According to Agarwal, inventory levels here are unsustainably high, and discounting may become necessary to clear stock, creating a tougher pricing environment and putting additional pressure on margins. "Prices will come under pressure, and we'll see a wave of discounting toward December. Customers can expect some great deals by holding off on purchases for a bit," he advised.

Microfinance and unsecured lending is another area where Agarwal sees risk, expressing concerns that the increased lending in this space could create a bubble, especially as credit demand slows.

However, Agarwal remains optimistic about certain "green shoots". For example, he noted that companies with strong management and adaptive strategies could still succeed in this climate. One such outlier is Mahindra & Mahindra Ltd., which has effectively used pricing strategies to shield itself from the broader slowdown, he said.

On stock recommendations, Agarwal took a constructive view of metals, expecting global demand to rebound with China's recent stimulus package, which focuses on reviving its real estate sector. This development, he suggested, could be a tailwind for companies like Hindalco, which he described as well-positioned to benefit from the likely resurgence in commodity prices.

Despite his cautionary take on immediate returns, Agarwal noted that domestic systematic-investment-plan flows and retail investments continue to provide a cushion for the markets.

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