India’s famous consumption story is going awry. At least that’s what March quarter results of some large fast-moving consumer goods (FMCG) companies show. Volume growth numbers fell substantially for these companies, with Godrej Consumer Products Ltd (GCPL) reporting a mere 1% growth in the domestic branded business volumes. A bigger worry was the low-spirited management commentary, which suggests that the worst is far from over.
“When a generally measured management like Hindustan Unilever’s uses the term ‘recession’ in its comments in the post-results presser, it generally isn’t a one-quarter blip," pointed out analysts from Kotak Institutional Equities in a report on 4 May. On Friday, HUL’s management had said, “While FMCG is recession resistant, it is not recession proof."
Management commentary from GCPL and Dabur India Ltd wasn’t inspiring either. These two companies harped on the need for further fiscal stimulus to boost demand.
HUL’s volume growth for the March quarter was 7%, a drop from the double-digit growth seen for the previous five quarters. Dabur India’s volume growth was only 4%, while Britannia Industries Ltd reported a 7% increase in volumes.
In general, firms have emphasized about the slowdown in rural demand. Farm incomes have taken a beating. There is low consumer confidence. Plus, there’s the liquidity crunch that everyone seems to be coping with. Given these factors, the message seems clear: improvement in demand is not expected to happen quickly.
According to Credit Suisse Securities (India) Pvt. Ltd, the rural stimulus of direct income transfer to farmers announced by the government in the February 2019 budget will get fully rolled out only post- elections in June. “After that, we expect a minimum lag of 3-4 months for any impact to show up on consumption and company revenues. Thus, we do not expect any recovery in 1H FY20 and the earliest possibility of a pickup will be in 2H FY20," said Credit Suisse analysts in a report on Monday.
In another report, commenting on the overall consumption slowdown, Kotak pointed out, “An analysis of macro (household savings data) and (2) micro (sector and company volume data) suggests that households may have gradually reduced consumption due to insufficient income growth."
“The next (possibly same) government may have its task cut out to revive flagging economic growth. We believe a combination of (1) monetary stimulus and (2) structural reforms may help revive growth over time. The current slowdown may not be a mere cyclical one, as is generally believed," added Kotak.
Meanwhile, expensive valuations of most FMCG stocks show investors don’t seem to be factoring in the near-term demand slowdown concerns adequately. The Nifty FMCG index trades at 34 times one-year forward earnings, according to Bloomberg data. As far as the markets are concerned, FMCG stocks are still recession proof.