MUMBAI : How deep is the consumption slowdown?

Everyone in the market has the same question, but not many have the answer.

However, there are visible signs and put together, they show that Indians have no plan to ratchet up their consumption like they used to.

Discretionary spending is being axed and the ripple effects are visible in the equity markets now.

Titan Co. Ltd’s shares ended a massive 12% down on Tuesday. The company said it witnessed a tough macroeconomic environment in the June quarter with consumption being hit due to rising gold prices.

Bajaj Finance Ltd, a key lender to consumers for discretionary spending, fell as much as 8% on Monday, although it has since then recovered about three-fifths of those losses.

(Graphic: Vipul Sharma/Mint)

Sanjiv Bajaj, who steers this successful consumer lending business, believes when cricket-obsessed Indians refrain from buying a television set to watch the World Cup, it is time to worry more.

In an interview with CNBC- TV18 on Monday, Bajaj said that the slowdown is dramatic.

The lender’s business model is wrapped around hooking Indians to spend more, one equated monthly instalment to another. Even though Bajaj expressed worry that his firm is not seeing the growth rates it used to, the company reported an impressive 41% growth in assets under management (AUM) for the first quarter.

While investors were initially troubled by the “dramatic slowdown" comment, they seem to have later concluded that Bajaj Finance has had a good track record of bucking the trend, something its AUM growth in the June quarter also suggests.

Titan, on the other hand, has more pain. Gold prices have surged and the government announced a 2.5% hike in customs duty on gold and precious metals in the budget. Ergo, a slew of broking houses such as HSBC Securities Capital Markets (India) Pvt. Ltd and Credit Suisse Securities (India) Pvt. Ltd have downgraded the stock, citing stretched valuations amid slowing growth.

According to Credit Suisse, Titan’s price-to-earnings multiple has no room to further rerate. Domestic broking house Motilal Oswal Securities Ltd has lowered its earnings per share estimates by 2.7%/1.8% for FY20/FY21.

Indeed, it would be unfair to pin the entire weakness in consumption stocks to just the slowdown.

“Discretionary stocks show more volatility than those of consumer staples. Therefore, part of the fall could also be because of stretched valuations," said Nitin Gupta, an analyst at SBICAP Securities Ltd.

Nevertheless, the fact that consumption is benign has triggered a long overdue correction in stocks. “Also, the increase in income tax for high-income individuals would impact consumption demand for high ticket discretionary items. So, if the June quarter earnings from other big companies in this space are below estimates, then the expected earnings recovery will get pushed further," said an analyst with a global brokerage firm on condition of anonymity.

To be sure, discretionary buying is the first casualty during a widespread economic slowdown. But even toothpaste makers are feeling the hit, along with home gadget makers.

Fast-moving consumer goods (FMCG) company Godrej Consumer Products Ltd (GCPL) in its June quarter pre-result update said that it witnessed relatively softer demand across some of its geographies of operations during the quarter. “In India, demand continued to be challenging, impacted by a general consumption slowdown," it said in a press release on 3 July. The company said that it has recorded volume growth of close to mid-single digits during the quarter.

Analysts expect an extended summer to impact GCPL’s household insecticide sales in India, whereas the soaps category is likely to be subdued owing to an unfavourable base and demand slowdown in rural areas. Analysts are estimating volume growth of 4-5% and value growth of 2-3% in the India business for GCPL.

So, the slowdown is real but is it, as Bajaj says, dramatic?

Abheek Barua, chief economist and executive vice president at HDFC Bank Ltd, believes that the slowdown is on anticipated lines. “One of the indicators that I have found very useful is the growth of regional FMCG brands rather than large national ones. You tend to move down to lower price category in items like toothpaste or other staples during a broad-based slowdown. There is the substitution effect and performance of some regional brands suggest that their growth was higher than normal in the March quarter," he said.

The next key question is how long will the slowdown stretch.

The answer would be visible if one monitors the rural markets. The delay in the onset of the monsoon has already impacted the outlook on incomes in rural markets. Already facing a tightening of the purse strings, farmers are even more wary of spending now.

With the Union budget giving no immediate fillip to consumption, all eyes are now on the monetary policy to push consumption demand. Even so, it is likely that it could get worse before it gets better and most analysts are foreseeing a delay in consumption revival.

“The consumption slowdown may have bottomed out due to passing of uncertainties of elections, but is unlikely to fly much higher. There is a lot of expectation that stimulus provided to farmers (in the interim budget) will translate into better rural demand. However, these amounts could be first used to repay debts and even if they start spending immediately, it would be for low-value basic items and not high-value items," said Indranil Pan, chief economist at IDFC First Bank Ltd.

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