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Interested in Consumer Discretionary Services? Introducing the BQiT Consumer Discretionary Services Index

carousel-554998_960_720In any economy, the role played by the Consumer / FMCG (fast-moving consumer goods) sector cannot be overemphasized. These products are required for daily sustenance and therefore have stable demand and deep penetration, across developed and emerging markets.

As opposed to pure-play consumer/ FMCG products, Consumer Discretionary Services (CDS) reflect consumer spending which is largely discretionary in nature. These are the services which help improve consumers’ quality of living. While expenditure on FMCGs is a necessity for most, the same cannot be said about Consumer Discretionary Services. As disposable incomes grow, we believe expenditure on Consumer Discretionary Services may corner a growing share of the consumer’s wallet, going ahead, vis-à-vis expenditure on FMCGs. Penetration of CDS in India may improve substantially in future.

Rising expenditure on Consumer Discretionary Services could translate into higher revenues and profits for companies belonging to the sector, which could potentially drive price performance of Consumer Discretionary Services stocks, going ahead.

BQiT Consumer Discretionary Services Index

We constructed a ‘Consumer Discretionary Services’ Index, which captures the trend in the free-float market cap of a basket of stocks within the space, belonging to the following segments:

  • Multiplexes
  • QSR/Food Delivery
  • Travel and Leisure
  • Cable/DTH/Internet Providers
  • Theme Parks
  • Fitness Services
  • Skincare and Beauty Services
  • Gaming and Entertainment

Objective

The objective of constructing the BQiT Consumer Discretionary Services Index, is to ascertain investor appetite for this basket of stocks, as captured by the performance of the Index, in absolute terms, as well as relative to comparable and broad-market indexes.

Sectors such as banking, telcos and education are excluded from the Index, since these are considered essential services and not discretionary.

Index Constituents

For the Index, we selected the following 12 stocks, covering the gamut of Consumer Discretionary Services, on the basis of criteria of business model, brands, national presence, management capabilities, revenue size, balance sheet and market capitalization:

  • PVR Ltd.
  • Inox Leisure Ltd.
  • Jubilant FoodWorks Ltd.
  • Westlife Development Ltd.
  • Thomas Cook India Ltd.
  • Cox & Kings Ltd.
  • Dish TV India Ltd.
  • Hathway Cable & Datacom Ltd.
  • Wonderla Holidays Ltd.
  • Talwalkars Better Value Fitness Ltd.
  • Kaya Ltd.
  • Delta Corp Ltd.

All of these companies were profit making in FY16, except Thomas Cook India Ltd. and Hathway Cable & Datacom Ltd.

However, we would like to clarity that merely by including them in our Index, we are not recommending any of these stocks.

Also, free-float market cap is not the same as stock price returns, where the free float has changed significantly. For instance, stock price of PVR Ltd. grew by 51.1% during the above period, while its free-float market cap grew by 78.9%, due to increase in price and free float.

Methodology

The Index is based on the free-float methodology, and computed using daily values, for the last 2 years, i.e. for the period July 7, 2014 to July 5, 2016. We have also compared the BQiT CDS Index with Nifty India Consumption Index, the Nifty FMCG Index and the Nifty 50 Index, for the same period.

Quarterly free-float data has been considered. Issue of capital has been incorporated into free float market cap from the date of issue. Dividends have not been considered.

Index Chart

BQiT Consumer Discretionary Services Index

Source: NSE, BSE Data, Beyond Quant InvestTraining

Index Performance Table

BQiT CDS Index Nifty India Consumption Index Nifty FMCG Index Nifty 50 Index
Returns over last 2 years 23.6% 24.3% 21.3% 7.0%
Returns over last 1 year -6.4% 4.4% 6.5% -2.2%

Comments on Comparable Index

Nifty India Consumption Index comprises of companies in the FCMG, hospitals, pharmaceuticals, paints, automobiles, apparel, telecom, media and energy segments in both product and service categories. This index does not differentiate between product and services businesses.

In contrast, the BQiT CDS Index focuses exclusively on Services businesses.

The only stock common to both indexes, is Jubilant FoodWorks Ltd.

Observations

The BQiT CDS Index has performed in line with the Nifty India Consumption Index and the Nifty FMCG Index, over the 2-year period. Particularly, the performance of the BQiT CDS Index was spectacular in the first 13-odd months, i.e., during the period July 2014-August 2015.

However, the Index underperformed the Nifty India Consumption Index, the Nifty FMCG Index and the Nifty 50 Index over the last 12 months, giving negative returns. Index heavyweights PVR (+70.7%), Thomas Cook India (+64.8%) and Inox Leisure (+39.0%) supported the Index performance over the last 12 months.

The overall underperformance of the BQiT CDS Index over the last 12 months is largely attributable to the underperformance of other Index-heavyweights Jubilant FoodWorks (-36.0%), Hathway Cable & Datacom (-34.0%), Cox & Kings (-31.9%) and Westlife Development (-18.2%), over the last 12 months.

Valuations

Typically, service businesses command a valuation premium over product businesses. Going ahead, based on financial performance, these companies could fetch better valuations vs. FMCG companies.

Likely Spin-offs

Such valuation premium, commanded by service businesses over product businesses, is the primary reason why CDS businesses could be carved out from product-focused businesses and spun off into separate entities. Kaya Ltd., formerly Marico Kaya Enterprises Ltd., which was spun off from Marico Ltd. and listed as an independent entity, is a key example.

Conclusion

Over the last 2 years, the BQiT CDS Index has outperformed the Nifty FMCG Index. However, over the last 12 months, investors seem to have preferred FMCG stocks over CDS stocks, judging by the sector’s underperformance relative to the Nifty FMCG index.

Financial Overview
Sector Aggregates (RsCr)

Full Market Cap 49,823 Gross Block 12,818
Free float Market Cap 22,645 Long-term Debt 6,965
Sales FY16 19,419 Debt-equity ratio 0.73
EBITDA FY16 3,738 P/e FY16 81.3
PAT FY16 612 P/c FY16 21.6
RoE 6.4% P/b FY16 5.2
EBITDA margin 19.2% P/s FY16 2.6

Note

Consolidated financials considered.

Comments on Financials

Sector PAT is impacted by the losses reported by Thomas Cook India Ltd. and Hathway Cable & Datacom Ltd., leading to high p/e multiple for the sector.

The sector reported a very low RoE of 6.4% in FY16. The debt-equity ratio is high at 0.73x. The fixed assets turn stands at a low 1.5x, which indicates asset-heavy business models.

We believe these ratios do not do justice to the robust business models and potential of the companies within the sector. A significant improvement in these ratios is essential to retain investor interest in these stocks.

Index Constituents Overview

Name of Sector / Company Total No. of Shares Cr Free Float Shares Cr Price Rs Full Market Cap RsCr Free Float Mkt Cap RsCr Weight in Index
Movie Exhibition            
PVR Ltd. 4.67 3.47 1003 4,683 3,478 15.4%
Inox Leisure Ltd. 9.65 4.92 247 2,383 1,215 5.4%
QSR/Food Delivery            
Jubilant FoodWorks Ltd. 6.58 3.38 1233 8,114 4,165 18.4%
Westlife Development Ltd. 15.56 5.88 249 3,865 1,462 6.5%
Travel and Leisure            
Thomas Cook India Ltd. 36.59 11.77 223 8,150 2,622 11.6%
Cox & Kings Ltd. 16.93 8.62 173 2,927 1,491 6.6%
Cable/DTH/Internet Providers            
Dish TV India Ltd. 106.59 37.90 99 10,515 3,739 16.5%
Hathway Cable & Datacom Ltd. 83.05 46.94 34 2,836 1,603 7.1%
Theme Parks            
Wonderla Holidays Ltd. 5.65 1.64 399 2,254 654 2.9%
Fitness Services            
Talwalkars Better Value Fitness Ltd. 2.97 1.84 237 703 436 1.9%
Skincare and Beauty Services            
Kaya Ltd. 1.29 0.51 886 1,143 449 2.0%
Gaming and Entertainment            
Delta Corp Ltd. 23.07 13.64 98 2,251 1,331 5.9%
TOTAL       49,823 22,645 100.0%

What Next?

Investor appetite for companies belonging to CDS segments has been strong in the past.

A few CDS companies have raised private equity funding over the last few years. We believe companies belonging to CDS segments such as spas and salons, food delivery, facilities management, etc. could go public.

A number of CDS companies such as VLCC Health Care Ltd. (Beauty and Fitness), Jawed Habib Hair & Beauty Ltd. (beauty salons), have already filed DRHPs for their IPO. Companies like Richfeel Health and Beauty Pvt. Ltd. (hair care) could seek further PE funding and eventually go public. This is an indicative list only, and not an exhaustive list.

Annexure Chart

BQiT CDS Index: Market Cap Weights

BQiT CDS Index: Market Cap Weights

Disclaimer

This blog article is for educational purpose only, and not meant to be investment advice, or a recommendation or solicitation to buy, or sell, the securities named herein. It is based primarily on information publicly available, including company websites, published financial results, annual reports, analyst presentations, media reports, etc.

The author does not claim accuracy of his opinions and estimates as contained in this article. While the author has taken reasonable care to avoid errors or misstatements of facts, he does not accept responsibility for errors, if any, in this article.

In any case, the author will not be liable for losses, if any, arising from the use of this article.

About Nitiin A. Khandkar

Nitiin A. Khandkar is a Chartered Accountant and the Founder of Beyond Quant InvestTraining, an investment training venture based in Thané (Mumbai) India. Prior to founding Beyond Quant InvestTraining, he has had a multi-faceted career as a sell-side equity research analyst in India, a buy-side analyst and portfolio manager in US equities. He was Head of Institutional Equity Research desks, with a couple of sell-side firms in India. In the past, Nitiin has arranged one-on-one institutional investor road-shows for a few India-listed companies. He has also marketed Indian IPOs to foreign institutional investors and private equity investors. Nitiin was the winner of the Best IPO Analyst Award for 2009 by television channel Zee Business. He has worked in India and overseas. Nitiin remains passionate about Value Investing, and likes to read books on the topics. He continues to write on investing themes, and builds financial models on Indian companies. Nitiin also advises Indian start-ups/corporates on raising funds from VCs/PEs. Nitiin can be reached at [email protected] and [email protected].

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