For investors looking to invest in Indian stocks, consumer goods stocks are the best bet even when their shares aren't cheap. That's the view of Axis Mutual Fund whose long-term equity portfolio holds 26 percent in consumer discretionary and staples companies.
"If you want to play India, you need to invest in stories that are directly linked to consumer spending in some form," Jinesh Gopani, a fund manager of equity at Axis Asset Management, told Bloomberg last week.
But what's driving this optimism into the consumer goods space?
It's the Indian shoppers.
A gauge of consumer goods companies had rallied 54 percent last year on hopes of a revival in demand following Prime Minister Narendra Modi's decision of demonetization in late 2016 and the rollout of Goods and Services Tax in July 2017.
The recovery in the rural economy after two straights years of good rainfall and an increase in crop prices are also pushing the valuations higher.
As consumer goods companies have grown, so have their valuations, resulting in stock price growth outpacing profit growth.
India's three largest consumer goods companies — Hindustan Unilever (HUL), Godrej Consumer Products and Dabur — trade at a price earnings (PE) multiple of between 40 and 50. HUL's premium is far in excess of the 17 times PE its parent Unilever commands.
This doesn't seem surprising as the consumer goods stocks have beaten the benchmark Sensex by 5.2 percentage points in the last four years.
Axis Mutual Fund joins a growing chorus of bulls on consumer staples and branded goods as the government starts to spend more in the villages to boost farm incomes before next year's elections.
Axis Long Term Equity Fund, run by Gopani, has car-maker Maruti Suzuki India, Pidilite Industries and Avenue Supermarts among its top 10 holdings.
Meanwhile, Macquarie Capital Securities is bullish on five companies -- Hindustan Unilever, Godrej Consumer Products, Titan Co., Jubilant Foodworks and Bajaj Corp.