Consumer goods makers dig in for the long term

Discretionary spending cutback hasn’t stopped multinational firms from committing more investments in India


Wholesale prices rose 7.52% in November, a 14-month high, as onion prices nearly tripled and vegetable prices increased 95.3%, causing consumers to spend more money on daily necessities and adjust their grocery budgets to buy smaller packs or cheaper products. Photo: Mint
Wholesale prices rose 7.52% in November, a 14-month high, as onion prices nearly tripled and vegetable prices increased 95.3%, causing consumers to spend more money on daily necessities and adjust their grocery budgets to buy smaller packs or cheaper products. Photo: Mint

Mumbai: After growing well ahead of the economy for the past five years, the Indian consumption story lost a bit of steam in 2013 as individuals cut back on discretionary spending in the face of slower growth and obstinately high inflation that cut into household budgets.

That hasn’t stopped multinational consumer goods makers from committing more investments in the country, betting on its long-term potential.

Between 2007 and 2012, the FMCG (Fast Moving Consumer Goods) index of BSE posted 206% growth in total return to shareholders (TRS); by comparison, the BSE 500 is down 43.8% for the same period.

In the year to date for 2013, the FMCG index posted a mere 9.84% annual growth in TRS. To be sure, it outpaced the BSE 500’s 2.47% growth in TRS and delivered better returns than other sectors such as realty, consumer durables and power.

Consumer spending has started playing out in terms of the overall economy, Rahul Chakravarti and Gaurav Gupta, senior directors at Deloitte Touche Tohmatsu India Pvt. Ltd, said in a teleconference.

They expect most consumer packaged goods companies to grow in single digits to low double digits this fiscal year, compared with 20-25% growth seen in the past.

India’s economy slowed to 5% in the fiscal year ended March, the least in a decade, as companies put investments on hold in the face of high borrowing costs and delayed project approvals that strained their cash flows. Economic growth was 4.4% in the three months ended June and 4.8% in the quarter to September.

Inflation remains high. Wholesale prices rose 7.52% in November, a 14-month high, as onion prices nearly tripled and vegetable prices increased 95.3%, causing consumers to spend more money on daily necessities and adjust their grocery budgets to buy smaller packs or cheaper products.

Rural consumption growth slowed, too. “The growth has now come down from 20-25% to single digits and early teens in rural,” said Abhishek Malhotra, a partner at consulting firm Booz and Co.

The urban consumer was even worse hit than his rural counterpart. Between January and September, rural growth slowed to 4% from 7% in the year-ago period. Urban growth fell by six percentage points to 2% from 8% in the same period, according to data by research firm IMRB International, which tracks sales in 30 core consumer categories such as soaps, detergents and packaged staples.

“The growth this year has been flat compared to last year. Offtake was slow across rural and urban, but urban was worse hit,” says Praveen Kulkarni, general manager, Parle Products Pvt. Ltd, maker of Parle G and Hide and Seek biscuits.

He expects the company to grow 4-5% this fiscal on account of the price increases during the year. Kulkarni expects sales to improve after elections due by the middle of the year, but says consumer spending is likely to stay sluggish for the next two years.

The slowing growth saw the value of private equity (PE) deals in the sector fall by nearly 50% even as the number of deals were somewhat constant. According to data from Venture Intelligence, a provider of data and analysis on private company financials and transactions of PE and venture capital deals. In 2013, there were 28 PE deals in the consumer space, totalling Rs.413 crore in 2013 compared with 35 deals worth close to Rs.800 crore in 2012.

Foreign companies remain focused on the Indian market.

“Global consumer companies seem to be focusing on the Indian market in a big way. A couple of companies are carrying out their pilot projects in Indian markets, which if successful would be rolled out to other South-East Asian economies. Thus, from that perspective, there is enough mind share investment,” said Rachna Nath, leader of the retail and consumer practice at PricewaterhouseCoopers Pvt. Ltd.

The year saw the biggest buyback on Dalal Street as Unilever Plc, the Anglo-Dutch parent of Hindustan Unilever Ltd (HUL), increased its stake in the Indian subsidiary to 75% from 52.48% by spending nearly Rs.29,220 crore. In November, PepsiCo India Holdings Pvt. Ltd pledged Rs.33,000 crore of investments in the country by 2020.

Even smaller enterprises are intent on expansion.

“We want to be a Rs.10,000 crore company by 2020,” said Ullas Kamath, joint managing director, Jyothy Laboratories Ltd, who is expecting to close the financial year with close to Rs.1,350 crore of sales.

In the past two months, the maker of Ujala fabric whitener has raised Rs.650 crore to pay off debt that it had acquired during the acquisition of the Indian unit of Henkel AG in May 2011 and build a corpus of Rs.250 crore to fuel its growth.

As the Indian economy slowed, close to a dozen companies including HUL, Mondelez International Inc., Britannia Industries Ltd and PepsiCo India announced changes in their top management this year.

The new year will see new strategies play out, said Chakravarti and Gupta of Deloitte.

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