India is one of the largest consumption markets in the world. As the second most populous nation, it has a clear demographic advantage --- the working age group 21-59 accounts for 62.5% of population. India hopes to be $5 trillion economy by 2025. This can be a reality only if there are enough jobs created for everyone, increased spending and policies that can help the economy tide over banking crisis. There is a massive growth potential of consumption-oriented sectors. Low interest rates and consumer credit have so far supported the rapid growth in domestic consumption. While household savings have fallen from a high of 25% in FY10 to 17% in FY18, people are wanting to spend more. Money in hand generates the consumption push that India's consumer-centric companies want. But, that push is not happening for several reasons.
Macro data indicators, that can be used as a proxy for consumption, are in the soft zone. Volume growth of consumer staple companies has taken a hard knock. Automobile sales are in the slow lane. Consumer loan companies are not gung-ho. With a mixed forecast so far, monsoon remains a key variable. The Union Budget of Modi 2.0 did not give the desired economic stimulus to boost spending. In Q3 of FY19, the slowdown in automobile and consumer durable sectors were balanced by sales growth of consumer staples as direct transfer schemes and government-led initiatives helped. But, the story changed in the Q4 as the government, in a desperate bid to keep fiscal deficit under check, lowered its expenditure, which could have triggered deceleration in the rural economy. Consumers, who were hoarding cash pre-election, are not spending too much amid seasonal pangs, liquidity tightening and soft macros. What happens to earnings of consumer-centric companies? Does the government come out with a mid-year stimulus or will the private sector take the responsibility of firing the investment engine to script a turnaround for the consumption story? With domestic consumption story being India's strongest point, both the private sector and the government sector would be foolish not to give it enough focus. Meanwhile, investors have to be prepared for a bumpy ride.
Different people attribute different reasons for the perceived consumption slowdown. Some blame it on cautious consumers and some on liquidity tightening. Others talk about how consumption was affected by base-effect. Plus, 'rural stress' seems to have become a favourite for all analysts. Nobody can tell why rural consumers are suddenly consuming less. Pro-government pundits dismiss any talk of rural distress, pointing to how incumbent BJP has won in the rural hinterlands in the recently held Lok Sabha polls. For instance, the BJP won 207 out of the 333 rural seats in 2019, increasing its tally from 190 in 2014.
In this scenario, expectations from the consumption sector are not high. "Our FMCG coverage universe is expected to deliver 9/9% YoY revenue/EBITDA growth in 1QFY20 (vs. 15/18% in 1QFY19 and 9/8% in 4QFY19). Rural distress continues with growth now at par with urban growth (vs. 1.2-1.3x urban in FY19). Low farm incomes, tight liquidity and weak consumer sentiments have dented demand. The slowdown is prevalent across categories with exceptions like summer products (juices, ice cream etc)," says a report by HDFC Securities - Institutional Research. This grim prognosis holds significance for investors in ITC, Hindustan Unilever (HUL), Nestle India, Dabur, Colgate, Emami and Jubilant Foodworks.
Welfare schemes launched by the state governments along with the PM-Kisan rollout should have spurred volume growth. But, an upswing is still elusive. Brent crude oil has decreased from its recent highs. With mixed forecast so far, monsoon remains a key variable
Monsoon come soon
Till July 10, cumulative rainfall was 14.7% below normal with the weekly rainfall 28.4% above normal. On a regional cumulative basis, spatial distribution has been deficient across India. Of the 36 sub-divisions across India, till date, 20 have received deficient rainfall, 13 have received normal rainfall, while three have received excess rainfall, as per Kotak Institutional Equities.
As of July 5, the total Kharif acreage was 26.7% lower than the same period last year. Rice sowing was 23.5% lower at 5.2 mn hectares. Oilseed acreage was 42.7% lower at 3.4 mn hectares and pulses acreage at 0.8 mn hectares was 71.6% lower than last year. Coarse cereal acreage was 26.4% lower at 3.7 mn hectares. Sugarcane and cotton acreages were at 5.0 mn hectares (5.1 mn hectares last year) and 4.6 mn hectares (5.5 mn hectares last year) respectively. "However, we note that acreage should have increased sharply over this week, given the favorable rainfall," says Kotak.
Basin-wise reservoir levels remained in deficit compared to long-term average levels. Of the larger river basins only Indus (north India), Mahanadi (central and east), and Narmada (central and west) were in surplus while Ganga (north and east), Godavari (west and south), Kaveri (south), and Krishna (west and south) were in deficit. Overall, basins and reservoirs were around 5.5% below long-term average for week ending July 11. Rural demand, as reflected by high-frequency indicators including rural wages, two-wheeler sales, tractor sales, remained weak. A strong monsoon could change that. In the Union Budget, the government did not deliver much to extend support for the rural economy by expanding the already announced assured income support scheme. In this scenario, tracking progress of monsoon is key. If monsoon picks up, then it should be positive for market sentiment in general and consumer-focused stocks in particular.
Winter is coming
In the case of consumer appliances, weak consumption is showing a dark shadow. While loans play a significant role in terms of people buying consumer appliances, future wage/income growth is an important aspect to watch for. The one bright spot for consumer appliances companies, however, was an unforgiving summer. This has made cooling products 'hot. But, ACs, coolers and stabilizers are not an all-weather story. If weakness in consumption trends persist, the game will drastically change in winter. This will have a bearing on earnings of Bajaj Electricals, Havells, V-Guard, and Crompton Greaves.
Passenger automobiles, an aspirational product amongst both urban and rural markets, have shown bad numbers. As the Indian automobile industry battles slowdown blues, the twin questions on top of investors’ minds are: Where do we stand in the current down cycle? How swift will the recovery be? Edeweiss Securities did an analysis of past 20 years’ demand cycles and found out that we are currently in the middle of a down cycle. And, what’s interesting is that the current slowdown is different from previous ones at least on four counts:
1) It’s driven by domestic factors rather than global events;
2) Stiff competition from growing organised pre-owned vehicles market;
3) Characterised by significantly higher margin pressure;
4) Led by prohibitive jump in vehicle cost. Hence, volume recovery is unlikely to be as sharp as in the past unless there is strong fiscal support.
Auto stocks have moved sharply down. For instance, Maruti is down 35% for the year ended July 12. Tata Motors is down 41%. Auto ancillary firm Omax Autos is down 71%. Pricol is down 57%. Tyre majors - Apollo, MRF and Ceat are down 26-31%. "Given the sharper-than-expected slowdown, we revise down FY20E and FY21E EPS of companies under coverage in the 2-18% range. We do acknowledge that given the tepid demand and BSVI implementation, near-term volume outlook remains hazy with risk of further earnings cut. However, we believe, divergence in performance among companies will be apparent post BSVI transition," says Edelweiss' Chirag Shah and Jay Mehta. Corporate revenue is seen growing 5-6% in the first quarter of fiscal 2020, the slowest in two years due to a broad-based slowdown in consumption which has impacted automobiles and FMCG. That compares with an average revenue growth of 14-15% in the past four quarters. The estimate is based on CRISIL Research’s analysis of 295 companies, which account for 60% of the market capitalisation of the National Stock Exchange. Miren Lodha, director, CRISIL Research points out that automobiles, one of the key sectors driven by consumption spending, continues to reel under a demand slowdown. Higher cost of ownership continues to dampen consumer sentiment for passenger vehicles, while commercial vehicle sales are being impacted by new norms, inventory build-up and liquidity crunch. Reliance Securities has given a few result plays in the consumer sector. Head of Research Naveen Kulkarni and research analyst Priyank Chheda forecast the following:
ITC: We expect cigarette volumes to grow by 4% Y-O-Y and 5% Y-O-Y growth via pricing in Q1 FY20E. FMCG sector likely to grow at 7% Y-O-Y while agri and paper segments may grow at mid-teen.
HUL: We expect the company to report 6% underlying volume growth albeit on higher base (Q1FY19 company reported 12% volume growth) and 3% pricing growth.
Marico: We expect the company to report 8% volume growth. Lower input prices are likely to result healthy gross profit growth.
Titan: The company to report strong performance in jewellery segment. Gold prices are up 9% Y-o-Y and 8% Q-O-Q and Q1 FY20 had higher number of wedding days. (The author is a journalist with 14 years of experience)