Consumer goods firms pin hopes on a good monsoon for recovery

After a lacklustre June quarter, companies are anticipating a spike in consumer spending in the festive season


After eight quarters on top, India lost the No. 1 spot in Nielsen’s global consumer confidence index—to the Philippines—in the June quarter. Photo: Bloomberg
After eight quarters on top, India lost the No. 1 spot in Nielsen’s global consumer confidence index—to the Philippines—in the June quarter. Photo: Bloomberg

Mumbai: The promise of a good monsoon is likely to spur consumption in the coming quarters, although the June-quarter results of consumer goods companies show that shoppers haven’t opened up their wallets yet. Rising prices too could add their bit to the revenues of these companies.

For the June quarter, aggregate net sales of Nestle India Ltd, Hindustan Unilever Ltd, Dabur India Ltd, Emami Ltd, Marico Ltd, Godrej Consumer Products Ltd and Jyothy Laboratories Ltd increased 5.71% compared with the same period a year ago. At least some of that was on account of higher prices. Aggregate net profit increased 32%, helped by lower input costs.

Companies representing discretionary spends ranging from quick-service restaurant (QSR) to apparel, footwear and consumer durables fared worse. Westlife Development Ltd, the parent company of fast food multinational McDonald’s west and south India franchisees, Future Lifestyle Fashions Ltd, Shoppers Stop Ltd, Tata group’s Trent Ltd and Titan Co. Ltd, Bajaj Electricals Ltd, Videocon Industries Ltd and Bata India Ltd reported an aggregate net loss of Rs.9.53 crore against a net profit of Rs.32.89 crore for the same quarter last year, largely pulled down by Videocon, which reported a net loss of Rs.286.64 crore. Aggregate net sales declined 0.34%.

“There is a tilt towards savings, versus discretionary spending, a softening in volume growth of the consumer goods baskets compared to last quarter and muted auto sales,” said Prasun Basu, president, South Asia, of market researcher Nielsen.

Not surprisingly, after eight quarters on top, India lost the No. 1 spot in Nielsen’s global consumer confidence index—to the Philippines—in the June quarter. Indeed, in the June quarter, sales volumes at consumer packaged goods companies may have hit a nadir.

“It was in the 4-5% range and now in this quarter, it is 0 to slightly negative for the market,” Hindustan Unilever chief executive Sanjeev Mehta said in July, while announcing the results of the June quarter.

The worst hit, in terms of channels, was general trade; in categories, the so-called mass ones. Both are a reflection of two successive years of deficient rains that have wreaked havoc on the rural economy.

Even for fast food chains such as McDonald’s, Dominos and Pizza Hut, the “recovery in consumer demand with respect to the QSR industry is taking longer than expected because of a weak macroeconomic environment,” said Aditya Joshi, analyst at Nirmal Bang Institutional Equities Research in a 9 June report. But the worst may be over.

Analysts see better quarters ahead. The festive season—the period between September to January that sees many Indian festivals and which is also the time when most customers spend more—starts in September, the monsoon rains have not disappointed, and government employees will soon get pay raises as the centre starts implementing the recommendations of the Seventh Pay Commission.

“All (are) positive indicators for higher consumption,” said Govind Shrikhande, managing director, Shoppers Stop. The next three quarters of 2016-17 will be better than the first quarter, he added.

The monsoon and the Pay Commission bonanza also figure in the calculations of Vivek Gambhir, managing director, Godrej Consumer Products Ltd, who hopes that the June quarter was “the bottom” and that “we see growth improving from here”.

Growth for consumer companies will also come from rising inflation. Britannia Industries Ltd has already effected a 5% price increase in the latter part of the first quarter. Marico raised the prices of one of its flagship brands, Parachute, by 5% in July.

“We anticipate price growth to return in the second half of financial year 2017 following (an) increase in (the) raw material prices of milk, wheat, copra, palm oil, etc,” said analysts Abneesh Roy and Tanmay Sharma of Edelweiss Securities Ltd in an 18 August report.

But inflation could cut both ways. Food inflation at 11% plus could crimp consumer spending, especially for low-income households in urban areas, said the Edelweiss report.

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