BackThe coming binge
The promise of bountiful rains after two years of drought, an imminent pay hike for govt staff and higher pensions for ex-servicemen could spur household spending and lift economic growth
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For the 600 million Indians who depend on agriculture for a living, the April forecast by the India Meteorological Department (IMD) brought the best tidings they received in three years. It also came as a shot in the arm to the makers of consumer products ranging from tea and toothpaste to trucks and tractors.
IMD’s prediction was for excess rainfall, with zero probability of deficit precipitation, in the June-September monsoon that waters most of India’s crops. After back-to-back droughts in 2014 and 2015 that took a heavy toll on rural incomes and dented consumer spending, even the promise of bountiful rainfall this year was cause enough for celebration in Asia’s third largest economy, among policymakers, market participants and farmers.
The weather office reaffirmed the forecast in June, saying the odds overwhelmingly favoured an above-normal monsoon—106% of the long period average (LPA)—that would be evenly spread across the country.
Hopes are high that the forecast will turn out right. From deploying underwater robots in the Bay of Bengal and an atmospheric research aircraft to negotiating the purchase of a $60 million supercomputer, IMD isn’t stinting on efforts to make the world’s most enigmatic weather pattern, the south-west monsoon, more predictable.
The monsoon, dubbed by some as the “real finance minister of India", holds the key to India’s economic fortunes. Generous monsoon rains boost farm output and rural consumption demand. A sub-par monsoon—like in 2014 and 2015—have the potential to cause serious rural distress and a slowdown in demand for packaged consumer goods as well as durables.
There are other reasons for consumer product makers to be hopeful of a rebound in demand this year—pending salary hikes and payment of arrears for government employees will mean more money in the hands of that class of consumers, who can be expected to spend a part of that bonanza on durables.
To be sure, there are already signs of a revival in consumption. The Indian economy grew 7.6% in the fiscal ended March and 7.9% in the quarter to March to become a $2 trillion economy as a recovery in private consumption demand compensated, at least partly, for weak investment demand.
Consumer confidence is also at an all-time high. A study by market research agency Nielsen in May ranked the Indian consumer as the most confident in the March quarter among 63 countries surveyed, handing back the top position to the country after nine years.
India’s consumption story is not new. It is being retold now after a sustained slowdown in Chinese growth and faltering global economic growth.
In a 1 June research report titled India Consumer Close-up, Goldman Sachs Group Inc. said India’s consumer story in the coming 5-10 years will be shaped by its 440 million millennials (people reaching adulthood around 2000) and 390 million Gen Z (born after 2000).
“The sheer size of India’s youth, combined with improved education, pave way for sustained growth in purchasing power and makes India’s consumer story one of the world’s most compelling for the next 20 years," the investment bank said.
In the short run, however, consumer product makers, policy wonks and economists are pinning their hopes on the monsoon, the ₹ 70,000 crore in pay increases for government employees and higher pensions for ex-servicemen to deliver a demand boost.
“We have already seen the benefits of the monsoon in parts of the country where it has already arrived," said Anil Talreja, a partner at consulting firm Deloitte Haskins and Sells.
“Farmers are getting proactive and have started the sowing of paddy and the kharif (summer) crops and this has given a boost to ancillary industries such as fertilizers, chemicals and such. A good monsoon will spur consumption across India," he added.
The sowing of rain-fed kharif crops has begun with the onset of the monsoon, the agriculture ministry said last week. According to preliminary reports received by the ministry from the states, farmers have planted 7.1 million hectares with crops such as rice, pulses, coarse cereals, oilseeds, sugarcane and cotton.
The seasonal area—or the total area where crops are planted during the entire kharif season—is 106.2 million hectares.
Although the area planted so far is lower than the 7.7 million hectares sown by this time last year, planting is expected to pick up as the monsoon progresses.
For the packaged consumer goods sector, the consumption story is one of moving people from unbranded into branded products, and this will happen when they have disposable money in their hands after their basic necessities such as food are taken care of, said Vivek Karve, chief financial officer at Marico Ltd, the maker of Saffola cooking oil and Parachute hair oil.
“If the good forecasts this year for monsoons come through, then there will be an uptick in demand starting from July-August and the impact will be seen on earnings in the second half of the financial year," he said.
Sure, tepid global demand and a slow recovery in domestic demand in recent months have led to idle capacity at most Indian companies, forcing some, even those that aren’t burdened by heavy debt, to postpone expansion plans.
Still, things may just be turning around.
According to a survey of around 35,000 companies and industry associations in 102 sectors by lobby group Confederation of Indian Industry and the Associations Council, an industry forum, 30.8% of respondents reported capacity utilization to be in the range of 75-100% in the March quarter, compared with 21.4% in the previous quarter.
About 53% of the respondents reported capacity utilization in the 50-75% range in the March quarter—marking a marginal improvement from the December quarter. The share of sectors witnessing a high growth rate of 10-20% surged substantially to 20.6% in the March quarter against 6% in the December quarter, according to the survey.
A MintAsia analysis of 357 BSE 500 firms, excluding financial, information technology and energy companies, for which comparable data was available for at least 22 quarters, also pointed to a steady recovery in the March quarter. The net profit growth of 17.42% in the March quarter was the best since the quarter ended 31 September 2014, while net sales growth was the highest since the quarter ended 30 June 2014, signalling that a turnaround in earnings could be round the corner.
Analysts are predicting double-digit profit growth for firms in the current fiscal, having seen flat-to-weak growth for a few years now. Encouraging growth momentum, a possible revival in rural demand and a recovery in commodity prices are the key drivers for the expected improvement in corporate earnings.
In the quarter ended March, the net profit of Sensex-30 and Nifty-50 companies grew 16.72% and 10.11%, respectively, from a year ago, compared with a 4.42% and 6.69% decline, respectively, in the December quarter.
“We believe the earnings have troughed out," said Vaibhav Sanghavi, managing director, Ambit Investment Advisors Pvt. Ltd.
“Some amount of improvement in the economy is getting reflected in revenue growth. This time around, apart from margins improving, we also saw sales gaining traction," he said.
For fiscal 2017, Sanghavi expects earnings growth of firms linked to BSE’s Sensex and National Stock Exchange’s Nifty indices to exceed 10%. “The GDP (gross domestic product) growth is gaining traction. Domestic consumption is going to drive further growth and the rural economy is also now pitching in on the back of a better monsoon and increasing government focus on it," Sanghavi said.
According to Devendra Joshi, equity strategist-Asia Pacific, HSBC Holdings Plc, net profit of Sensex companies will rise by an average 10% in the calendar year 2016 and improve to around 14% in the following year. “Things are looking up for earnings. The signs are more encouraging than what they were last year," Joshi said in an interview in Mumbai on 9 June.
“The growth signs should continue for earnings to play out well. We need to see if the macroeconomic data points from here point to stable or rising economic growth," Joshi added.
In a note on 1 June, Nomura Financial Advisory and Securities (India) Pvt. Ltd said India’s overall economic growth was starting to accelerate, which should help company earnings.
“A good monsoon, the ongoing recovery in capex (capital expenditure) and the push to consumption from the Pay Commission should add to this growth," Nomura analysts added in the note.
The recent tepid growth in factory output data and spiralling food inflation have raised concerns among analysts, but strong growth evidenced by some high-frequency indicators such as cargo traffic at major ports, automobile sales, air passenger and freight traffic, cement output and steel consumption are hard to miss.
India’s domestic passenger traffic soared 21.8% in April, marking the 20th month of double-digit traffic growth, the International Air Transport Association (IATA) said in a report in May. Buoyed by the growth, India’s airlines are adding 50 planes to their fleet of 450 this fiscal year. Aviation consulting firm CAPA expects growth to exceed 20% in the current fiscal year.
Sales of passenger vehicles in May grew 6.26% from a year earlier for the 11th straight month, although growth slowed from the double-digit pace in April. Sales across vehicle categories, including commercial vehicles, three-wheelers, motorcycles and scooters, grew in the high double digits in April-May, according to the Society of Indian Automobile Manufacturers (Siam).
Sales of two-wheelers, in particular, grew 15.29% in April-May, signalling a pick-up in rural demand.
Indians’ preference for big and brawny utility vehicles showed no signs of waning in the first two months of the fiscal, growing 39.4%, even though car sales growth remained low at 0.5% in April-May.
A good monsoon after two consecutive years of sub-normal rainfall could turn around sentiment in the rural markets, said Pawan Munjal, chairman and managing director of Hero MotoCorp Ltd. That will boost the automobile industry.
“Monsoon will have a positive impact, but we will have to first wait and see how good it is. Any impact will only be felt around the festive season later this year," said Sumit Sawhney, managing director at Renault India Pvt. Ltd.
R.C. Bhargava, chairman of Maruti Suzuki India Ltd, cautioned that growth wasn’t across the board. “In automobiles, there is a lot of excess capacity with a lot of companies. The growth is limited to three-to-four companies, and it is not happening across companies. Apart from Maruti and Hyundai, not many are having a sustainable growth," Bhargava said.
Demand for cement, which is also an indicator of demand in the labour-intensive construction sector, has seen sustained improvement with growth touching 8.5% in April.
According to a report by India Infoline Ltd (IIFL), cement prices increased in the southern, eastern, and central regions of India in May, while prices declined in the western and northern regions due to weak demand.
Amey Joshi, associate director (corporate) at India Ratings and Research Pvt. Ltd, said he expects cement demand to grow 6% in the current fiscal—mostly driven by government spending.
Pay hikes for government employees and higher economic growth “may increase spending power, but that may translate into more demand for other sectors than housing, which is key for cement consumption," Joshi said. “A better monsoon may help with some increase in rural housing demand."
Shailendra Chouksey, whole-time director at J.K. Lakshmi Cement Ltd, said traction in cement demand will come from infrastructure projects that are now being revived after languishing in the past few years for lack of mandatory approvals, difficulties in land acquisition and a funding crunch.
“Real action will happen when the planned ‘housing for all’ projects pick up," he said.
The ‘Housing for all by 2022’ scheme aims to provide nearly 20 million affordable homes to the poor in urban areas over seven years.
Domestic steel prices have picked up following government support through steps such as the imposition of a minimum import price and extension of safeguard duty up to March 2018.
After eight months of contraction, domestic steel production picked up in March and April by 3.4% and 6.1%, respectively.
“Better farm income will be a positive for the steel sector but will not be immediate. If monsoon is good, it may translate into demand for auto and even for rural construction, which in turn will lead to steel demand. The impact will, however, be seen with a lag," said Goutam Chakraborty, an analyst at Emkay Global Financial Services.
Amrit Jha, Tarun Shukla and Amritha Pillay contributed to this story.
asit.m@livemint.com
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