India’s K-shaped story: Will the script change in 2025?

Once a product strictly reserved for the affluent, while always a barometer of aspiration, the iPhone neatly sums up India’s consumption story in 2024. Apple sold iPhones worth $10.7 billion or ₹90,680 crore in India in the first nine months of the year, with the September quarter (Q2FY25) logging the largest-ever quarterly shipment at four million units, according to the International Data Corporation, a market research firm.

The iPhone exemplifies India’s post-covid consumption story which starts with a K—all caps and bold. The affluent and the upper middle class came out of the pandemic with an untameable demand for luxury and aspirational goods and services while the lower strata, still fighting inflation, have strictly kept spending limited to necessities.

“Consumption in 2024 and most likely in 2025 will be a tale of parts,” Trideep Bhattacharya, president and chief investment officer (CIO) of equities at Edelweiss Mutual Fund told Mint. “We started the year strongly with robust luxury consumption and it stayed intact throughout the year. While urban (mass) consumption was a major laggard this year, rural consumption will kick in sometime in 2025.”

Such juxtaposing themes solidified the Indian stock market’s narrative in 2024, beneath all the froth and hype. The Nifty Realty index and the Nifty India Consumption index were two of the top performing sectors of 2024, returning 35% and 34% respectively. These two sectors were the biggest beneficiaries of “premiumization”, where strong demand for premium properties, SUVs, luxury hotels, jewellery and electronic durables boosted the profitability and hence, profits of many companies, all against the odds of a sticky inflation and negligible real wage growth.

However, those challenges defined the other half of India’s consumption narrative. Languishing sales volumes and suppressed profit margins of major fast-moving consumer goods companies (FMCG) and quick-service restaurant chain operators reflected a slowdown in the consumption of the lower-middle class.

In fact, the Nifty FMCG index was one of the worst performers, falling almost 1%during a bull run in the broader market. With demand woes reportedly continuing during the usually supportive festive season and expected to spill over into the new year, FY25 will be a year FMCG companies would like to swipe under the rug.

During such testing times, investors are betting on well-established trends like premiumization to sustain the momentum in 2025–especially in the real estate sector.

Luxury living

The post-covid real estate boom has been the hallmark of a roaring consumption-comeback story. As India’s real estate sector successfully finished its fourth year of a boom cycle, bouts of sales pickup and accelerated project launches have pushed up property prices across all seven major metros in recent years. No wonder, stocks of major listed real estate developers like Sobha Ltd, Oberoi Realty Ltd and Godrej Properties Ltd have returned 63%, 59% and 38% respectively, by the end of 2024.

With home sales increasing by 49% between 2022 and 2024, the average price per sq. ft has risen by around 41% since 2021, according to Anarock Property Consultants. Among the top markets, National Capital Region (NCR), Bengaluru, and Hyderabad have seen the biggest increase in prices, owing to an explosion in demand for high-ticket properties. Moreover, tepid affordable housing demand has prompted real estate developers to focus on the burgeoning luxury and premium segment, aiding the sector’s pricing trajectory even during a relatively slower first half in FY25.

“The premiumization trend in housing is evident from the fact that Q2FY25 sales volumes for top 17 developers were down 12% year-on-year (y-o-y) while sales value was up 1% y-o-y. Average sales realizations for this set of developers were up 15% y-o-y in Q2FY25,” a Nuvama Institutional Equities report from 27 November said.

The first half of FY25 was marked by muted launches due to approval-related issues. With state elections in Maharashtra and Haryana out of the way, experts are anticipating faster approval for newer projects in key residential markets like Gurugram, Mumbai Metropolitan Region and Pune.

Even though listed developers have exhausted their inventories, demand for luxury properties remains unsatiated. Hence, these players will have more pricing power and better realization gains for their newer properties. But at the same time, low inventory has made new launches a differentiating factor for listed real estate stocks since it is crucial for sustaining pre-sales volumes.

However, after a staggering 18% and 31% compound annual growth over the last four years, pre-sales volume and value might be impacted in 2025 due to the statistical effect of an already high base, according to a HSBC Global Research report dated 11 December.

With home sales increasing by 49% between 2022 and 2024, the average price per sq. ft has risen by around 41% since 2021.

Meanwhile, investors can take comfort from the fact luxury demand is still intact and listed realty companies have a lot of headroom for business expansion and new land deals, thanks to their robust cash flows. Most of them have utilized a good chunk of their operating cash flows and around 34% of their collections on land related capital expenditure, reducing their debt burdens, the Nuvama report noted.

“We remain constructive on the sector in the long run with a preference for players with a strong launch pipeline and robust balance sheets,” Pankaj Kumar, vice president of fundamental research at Kotak Securities told Mint. “An interest rate cut next year would likely lead to further re-rating of players, particularly in the mid-affordable segment.”

Lower interest rates would mean cheaper home loans which will improve affordability and hence demand for houses, particularly in the mid-affordable segment.

The P-word

High inflation coupled with elevated interest rates and tighter credit conditions curtailed the aspirations of many middle-class Indians in 2024—a phenomenon reflected in languishing entry-level passenger vehicle sales throughout the year.

While two-wheeler demand remained healthy, first-time buyers moved to India’s booming second-hand car market. Those who could afford flocked to the saturating sports utility vehicle (SUV) market as reflected in Mahindra and Mahindra Ltd’s robust Thar and XUV3XO sales volumes in Q2. As a result, the share price of M&M climbed 74% by the end of 2024.

But not just cars or houses, affluent Indians are also willing to a pay premium for new and unique experiences, which sustained the ongoing boom in India’s luxury tourism this year. Investors have been betting big on premium hotel companies ever since the post-covid boom in tourism coincided with a rise in luxury spending in the country in the last couple of years.

Shares of Indian Hotels Co Ltd (brands include Taj) and EIH Ltd (the Oberoi Group) have risen 99% and 67% by the end of 2024, and with tourism demand expected to outstrip the supply of fresh hotel rooms in the near term, experts see the upcycle in the industry to continue for the next three-four years.

Brands like Taj and Oberoi saw a 9-10% on-year rise in their average room rates (ARR) in Q2FY25, while occupancy levels remained high at around 72-78%. Even Lemon Tree Hotels Ltd benefitted from the ongoing premiumization in the mid-market segment, which boosted its consolidated ARR by 12% y-o-y, despite its relatively lower occupancy rates.

A different story of aspiration played out in the electronic durables sector where a particularly harsh summer boosted the sales of air conditioners (AC), resulting in a bumper H1 for Blue Star Ltd and Voltas Ltd. While Blue Star saw a pickup in its more profitable commercial air conditioning business, Voltas saw a 45% on-year rise in AC sales in the first half.

“ACs have become a standard feature for even affordable houses, as the proportion of AC cost to the cost of the home is quite low. Since it is a basic aspiration the whole family benefits from, AC sales will continue to grow even during regular summers,” Deepak Jasani, head of research at HDFC Securities told Mint.

ACs have become a standard feature for affordable houses, as the proportion of AC cost to the cost of the home is quite low.
—Deepak Jasani

Both Blue Star and Voltas offered impressive 128% and 84% returns in 2024, respectively. However, much of their current valuations, including that of Dixon Technologies (India) Ltd are backed by the promise of an upswing in India’s electronics manufacturing sector next year.

But Tata Group-owned Trent Ltd wrote the most defying consumption story of 2024, with the stock returning a whopping 129% throughout the year. The fashion and lifestyle retailer bucked the current trend of mass-market consumption slowdown with Zudio’s affordable yet trendy portfolio of products, posting a 44% on-year rise in net profits at ₹338 crore in Q2.

“Zudio has been particularly popular with the Gen-Z, and historically we have seen that brands which once resonate well with consumers tend to do better even during a broadly slow macroeconomic environment,” Bhattacharya noted.

Going forward, Nuvama expects a strong Q3 for retail companies owing to a material pickup in festive demand for clothes and jewellery in October—a momentum they expect to continue through the wedding season this year.

A defensive play

While investors bet boldly on India’s consumption story, bouts of external volatility also drove them towards more defensive sectors like healthcare and pharmaceuticals, crowning them as the best-performing sectors of 2024. The Nifty Healthcare index outperformed every other sector with a 40% return, while the Nifty Pharma index posted a solid 38% return last year.

Shares of major pharma companies like Sun Pharmaceutical Industries Ltd, Glenmark Pharmaceuticals Ltd and Mankind Pharma rose 51%, 89% and 45% respectively in 2024 whereas those of Max Healthcare Institute Ltd, Fortis Healthcare Ltd and Artemis Medicare Services Ltd rose 66%, 63% and 80% respectively.

An uptick in insurance penetration post-covid has led to higher footfalls in major hospitals, which coupled with a rising demand for complex treatments in oncology and cardiology has offered solid growth visibility to investors.

“Most hospitals’ networks are mature now. So, they are profitable and generate a lot of cash. These companies were already doing well, and they continued beating expectations this year,” Prashant Nair, lead pharma and healthcare analyst at Ambit Capital told Mint.

On the other hand, Indian pharma companies saw improved profitability in Q2 from higher sales of branded medicines in the domestic market, falling active pharmaceutical ingredients (API) costs and lower price erosion in the US generic market. Sun Pharma saw robust demand for its prescribed branded medicines, leading to 11% on-year growth in its domestic business despite its large size. Whereas Dr. Reddy’s domestic business grew 10% on-year in Q2, driven by three new brand launches in the quarter.

Most hospitals’ networks are mature now. So, they are profitable and generate a lot of cash.
—Prashant Nair

As per IQVIA Institute, the Indian pharma market grew 10.7% y-o-y in November, primarily driven by strong traction across all acute and chronic therapies. “On a low base of FY24, we believe better traction in acute therapies may continue to drive domestic market growth for the next couple of months,” an ICICI Securities report from 11 December said.

With profits from generic Revlimid sales in the US expected to peak out in the middle of 2025, analysts think pharma companies are well placed as they enter the new year. “Since the underlying businesses are doing fine, the defensive appeal of this sector also worked in its favour as we came towards the end of the year,” Nair said. “They did well in the face of market volatility and are likely to do so going forward.”

The year ahead

If 2024 was the year of aspiration and luxury consumption, market participants are anticipating a rebound in broad-based consumption in 2025, as they expect increased largesse from the government for the poor next year.

“The ‘Ladki Bahin Yojana’ (monthly stipends of ₹1,500 to women facing financial hardship) was a game changer for the ruling party in the recent Maharashtra assembly election. This indicates an upcoming shift in the economic regime because such schemes have become the success mantra in Indian politics,” Neeraj Chadawar, head of fundamental and quantitative research at Axis Securities told Mint. “We believe broad-based consumption could be back in 2025, led by the expectation of higher rural demand in FY26 as compared to FY25.”

While consumption remains a crucial driver of economic growth, experts are betting on India’s electronic manufacturing, IT, and the capital goods sector to be in favour next year.