Ludhiana: Nestle India Ltd., chairman and managing director Suresh Narayanan on Monday said that the ongoing festive season is expected to be good for consumer goods companies at large, but warned that the company is still keeping an eye on short-to-medium term consumption trends that have been a drag on sales of everything from cars to packaged food products. Addressing the media in Ludhiana on Monday, Narayanan said that overall demand sentiment is yet to improve but the recent round of corporate tax reductions will help boost earnings of corporates in India and stimulate investment cycle in the country.
“People are looking forward to the festive season. There is a bump that companies will get…for me, what needs to be watched is the short-to-medium term which is really the next six months," Narayanan said. “I have no reason to believe that the festive season will not be a good one but this alone will not be an answer to the longer-term secular issues of consumption that seems to be foremost in the minds of industry people," he added.
Narayanan's commentary on overall demand comes amid a softening in growth for consumer goods makers who have been complaining of sluggish sales, especially in rural markets. In fact, in July this year, market researcher Nielsen lowered its 2019 growth forecast for FMCG sector to 9-10% from its previous forecast of 11-12%, citing macroeconomic factors such as slowing growth and the impact of a deficient monsoon that it added had led to a sharp slowdown in rural demand.
Narayanan added that the FMCG sector has clearly seen strains and that "the levels of growth have come down". While the overall demand sentiment has not dramatically changed, the government’s recent move to slash corporate taxes will help stimulate capex and investment cycle in the country, he added.
In the last few months, the government has taken several measures to arrest the ongoing slump in demand, by taking measures directed at easing liquidity; late last month, the finance minister also announced a reduction in corporate tax rates in a boost to companies in India.
“The way corporate tax works is that it works below operating profits so this is really something that is likely to translate in terms of better earnings for companies and therefore for shareholders," he said hailing the move as a step in the right direction.
Nestle India is set to announce results for its third quarter on 8 November as India Inc goes into earnings season. The commentary from companies this earnings season could help gauge the impact of the current consumption slowdown in the market.
Commenting on this year's monsoons so far Narayanan said this year's surplus rains could bode well for rural incomes and help keep commodity prices in check. India has so far received above-average monsoon rains, a Reuters news report said on Monday allaying concerns around a deficit rainfall this year. This will likely help aid rural incomes and revive demand. "This year looks like we are headed for a pretty torrential monsoon and if this translates into a better agriculture cycle--together with whatever tax steps have been taken, I would hope there is a relenting of the agro-commodities where we are seeing a lot of stress," he added.
This, he added, will help shore up demand over the next few months.
There could be investment and commodity-led stimulus for consumption and the earnings effect of the corporate taxes that could also have an impact on consumption.
"I certainly see some of the benefits of these three accruing to the consumer goods space."
Nestle that sells breakfast cereals, packaged milk, and chocolates currently draws 25% of its sales from rural markets. Narayanan added that over the next two to three years the company hopes to draw 30-35% from India’s hinterland by expanding more rural specific price points and widening its distribution to reach more households.
For the quarter ended June 2019, Nestle India reported 10.83% per cent in net profit to ₹437.84 crore. Net sales during the quarter were up 11.35% at ₹2,982.83 crore. To be sure, Nestle India follows January-December as financial year.
The author was in Ludhiana on the invitation of Nestle India Ltd