Businesses associated with food like grains, cereals, beverages, and associated functions like food processing and food packaging, constitute the food and beverage industry. The food industry is essential for human life, and therefore it is expected to sustain and thrive under all market conditions.
In the current Covid-19 crisis, the food and beverage industry has been classified as an essential services and governments both Central and states have done their utmost to keep the supply chains in this critical sector of the economy intact. From an investment point of view during turbulent times, this sector serves as a safe haven to park investments but due to the investor flight to safety marquee names listed on the stock exchanges become extremely expensive and from a risk reward perspective become slightly unattractive.
Industry Composition-
Food and beverage sector is the biggest consumption category of the Indian economy with agriculture, beverage both non-alcoholic and alcoholic, dairy and food processing constituting the major portion. The huge population and the increasing levels of disposal income have led to differentiation in consumer demands, a large portion of the food and beverage sector demand now comes from discretionary choices in both food and beverages. The advent of the modern super market and online platforms for home delivery of groceries and other food items has also led to the expansion of the market demand. As per CII estimates, Indian consumer demand would be the fifth-highest in the world by 2025 with food and beverage sector being the biggest component of that demand. Following is a list of sub-sectors that constitute the food and beverage industry in India, although the list is not exhaustive but these broad categories capture the size and scale of the Indian food and beverage industry.
Broader Sectors in the Food & Beverage Industry:
Agri-Products
Consumer Staples-
Rice, wheat sugar and other daily consumables
Food Processing
Cold storage chains, grains and cereal mills, branded staples, fruit postprocessors
Food Retail
Local kirana stores, supermarkets, online grocery supply
Restaurant Industry
Standalone restaurants, food franchisee chains, online food delivery aggregators
Dairy Poultry & Meat
Food cooperatives, (Amul) local animal farms, butcher shops
Beverages
Non-Alcoholic
Carbonated drinks, fruit juices, lassi, mineral water
Alcoholic
Foreign Made Foreign Liquor, Indian Made Foreign Liquor, Breweries, Local Liquor, Vineries
Consumer behaviour during various phases of lockdown-
The government first imposed a 21-day nationwide lockdown on March 24 to curb the spread of Corona virus infections. On April 14, the lockdown was extended till May 3. Currently we are in the third phase of the lockdown, which is scheduled to end on May 17, that in all likelihood would be followed up with a fourth phase of the lockdown. As the various stages of lockdown have progressed, the consumers’ behaviour has also gone through changes which would positively or negatively impact companies operating in different realms of the food processing industry.
In the first phase of lockdown, consumers were largely focussed on food essentials, basic necessities that were essential for survival, therefore sale of food staples surged, along the way during the second and third phase of the lockdown as the restrictions were gradually eased, consumer demand in the more discretionary segment such as confectionery, packaged food and speciality food surged.
During the third phase, the government finally allowed the sale of alcohol that led to huge queues at the alcohol shops and the companies engaged in the manufacturing of liquor were the major beneficiaries. As the trend suggests and as restrictions are eased the consumption would move towards more discretionary items, restaurants, food chains, app based food delivery chains are expected to pick up their sales in all subsequent phases of the Covid-19 crisis.
Food and beverage industry as an investment opportunity-
As mentioned earlier, in turbulent times food and beverage industry due to its nature acts as a safe haven for investors, investors cut their losses in other sectors and park their money in the food and beverage counters and wait till the volatility subsides.
In general, food and beverage sector is a stable sector to invest in; companies in this space do deliver above average returns and also pay decent dividends which add up to the investment return. In turbulent times, due to over-crowding in this space, stocks witness sharp uptick which is followed by a downturn as uncertainty subsides.
Discretionary segments in this space are more cyclical in nature and their performance depends on the overall economic environment. The following charts are illustrations to the fact that quality names in the food and beverage space generally outperform the markets during turbulent times and do hold their values, e.g. Nestle and Britannia are marquee names in this space and have not only managed to outperform the benchmark indices but also have held on to their returns from their lockdown highs, whereas a more discretionary bet, a name like United Brewries has been more erratic in terms of returns and has provided less than spectacular returns.
The illustrative graphs are followed by a table which contains a non-exhaustive list of actively traded stocks in the food and beverage space. It can be seen from the table that select blue chip stocks in this space have regained most of their lost ground and are trading closer to their 52 week highs, therefore investors can look into these names from portfolio safety purposes but should not expect spectacular investment returns at this point.
Some quality stocks in the food and beverage space-
Few stocks which are the industry leaders such as Nestle India and Hindustan Unilever are currently trading at huge premiums; these are defensive good quality stocks therefore these stocks can be considered for investments.
Nestle India Ltd: It manufactures and sells a variety of food products such as milk and nutrition, Prepared dishes and cooking aids, powdered and liquid beverages and confectionery. Going forward, we expect healthy growth and profitability on the back of strong brand recall, wide distribution network (4.6 mn outlets across India) and new product launches. Given the FMCG majors diverse product mix, strong market position with solid brand recognition, expanding distribution network, healthy financials and favourable macro traits, the company is well positioned for continued long-term growth.
Hindustan Unilever Ltd: It is engaged in manufacturing of branded and packaged FMCG products. We expect HUL to report a healthy bottom-line over FY2019-22E due to healthy volume growth on the back of a strong brand, wide distribution network and strong focus on growth both organic and inorganic. The recent merger with GlaxoSmithKline is also expected to be EPS accretive for the company in the long term.
Alcoholic Beverage Space
With the easing of restrictions on alcohol sale we expect that good quality names in this space will outperform. GM Breweries, Associated Alcohols & Breweries, Radico Khaitan, Globus Spirits and United Breweries and United Spirits are few names that can be looked at from an investment point of view.
Conclusion-
The Covid-19 crisis has structurally altered how people and government function, in the absence of a vaccine or a cure in sight, people have to learn and adapt to the reality that Covid-19 is here to stay. Things are going to normalise with time and various sectors of the economy will slowly pickup. The food and beverage industry in general terms is a safe space to stay invested in, the returns are average but there is plenty of safety.
In our opinion investors can look at making fresh investments in quality names in this space with a longer term outlook. Investors should however exercise discretion about the their investments as good quality stocks are already trading at a premium and in buying them they would be opting for average returns with higher safety, on the other hand, a stock in the alcoholic beverage space could provide higher return but the margin of safety would definitely be lower.
(The author is director, Wealth Discovery/EZ Wealth, New Delhi. He can be contacted at info@wealthdiscovery.in)