BackIndia’s consumer companies set to trump emerging market blues
Indian consumer companies seem to be in a better position because of the country's improving macroeconomic prospects
Premium
Global consumer firms have begun fretting about slowing growth in emerging markets, countries in which they had invested significant sums in recent years. This should not surprise, however, as the International Monetary Fund (IMF) had warned last month of emerging markets facing a broad-based economic slowdown. Some developed markets are offering some solace due to better growth rates, but not enough to offset slowing emerging market growth.
Unilever Plc said emerging market sales grew 5.6% in the September quarter, slower when compared with the 6.6% growth in the first half of 2014. Volume growth was flat, it said. Rival Procter and Gamble Co., too, said emerging markets grew slower, but did not give a figure. Colgate-Palmolive Co. said sales grew 4.5%, compared with 6.5% in the June quarter. Nestle SA said sales in emerging markets grew by 9.5% in the nine months ended September, compared with 9.7% in the first half.
Consumer demand in emerging markets is getting affected because of weaker economic growth, in major markets such as Brazil and China. In China, the slowdown has meant that pipeline inventory has increased, and consumer companies are focused on clearing this pipeline first. Once that happens, then primary sales to the trade channels should pick up again. Companies seem to be bracing for a continued slowdown in growth in emerging markets.
India could be a different story, however. There are some things going in its favour. Economic growth seems to be recovering and inflation seems to be declining, particularly wholesale inflation. If the current trends continue, consumer demand should recover, especially in urban markets. Rural growth is subject to what happens to agricultural growth and may also get affected if the government actually cuts allocation to the rural employment guarantee scheme.
Falling inflation is a big plus as it can improve profitability, or give companies leeway to spend more on advertising and promotions.
Therefore, India may resemble an oasis for consumer companies, relative to other emerging markets. But it is not without challenges. Declining inflation typically sees regional and local brands cut prices or offer discounts faster, to snatch market share from the bigger firms. Faced with a slowdown in emerging markets, bigger companies may be reluctant to cut prices. That could see them ceding market share. This tug of war for share could cause some volatility in the medium term as firms adjust to the changed market conditions.
Overall, Indian consumer companies seem to be in a better position because of the country’s improving macroeconomic prospects. While that is good for their earnings, it is also likely to keep investors interested in Indian consumer stocks.
The BSE FMCG Index has gained 5.3% in the past three months and is trading at an expensive price-to-earnings multiple of 39 times. But that valuation may hold up if India can make good its promise of outperforming other emerging markets.
Milestone Alert!Livemint tops charts as the fastest growing news website in the world 🌏 Click here to know more.
