A Trifecta Of Troubles For Consumer Companies This March Quarter

There’s a cash crunch in the system and people are not buying as they used to, indicating a slowdown in the economy, said four distributors across four states.

Wholesalers are also not purchasing anymore as there is pile up of inventory at every level of the distribution chain, a distributor in north India said. The credit cycle has also more than doubled to 21-30 days from 7-15 days, he said, adding that some wholesalers are making only partial payments for the goods.

Agreed distributors in west and south India. Inventory days have gone up to 15 days from seven-10 days, a distributor in the west said.

Company executives and analysts agree that liquidity issues at the wholesale level are one reason.

Wholesalers are holding on to cash ahead of the elections as well as there’s a diversion of funds towards polls, leading to a “cash crunch kind of scenario in the system”, according to Mayank Shah, category head at Parle Products Pvt. Ltd.

Inventory also piled up as companies pushed stocks in the December quarter, said Sanjay Manyal, vice president at ICICI Securities Ltd, to BloombergQuint.

“There’s a liquidity issue and there’s a stress on consumption which is consequent to the agrarian distress,” Sunil Duggal, chief executive officer of Dabur India Ltd., told BloombergQuint over the phone. The situation, he said, is magnified due to prolonged winter in north India that impacted consumption of summer products such as juices and talcum powder.

The Big Picture

But trade issues aren't the only problem. Recent economic data has pointed to slowing consumption. Private final consumption expenditure grew 8.4 percent in the October-December period compared to 9.8 percent in the preceding quarter, according to data released by the Ministry of Statistics and Programme Implementation.

The industrial output data also shows volatility. The consumer non-durables segment in Index of Industrial Production grew 4.2 percent between April 2018 and January 2019, much slower than 10.5 percent last year. Segments such as sugar and confectionary have seen weakness within that space.

Weak economic momentum became visible through discretionary demand and extended to staples as well, Credit Suisse said in a report. “Unless there is significant monetary easing (more open market operations, lower rates), growth could remain weak for a while. We stay underweight on consumption.”

No Recovery In Sight?

Bank of America Merrill Lynch and Deutsche Bank expect Hindustan Unilever Ltd.’s yearly volume to grow at a slower pace in the January-March quarter of the ongoing financial year. Volume growth at India’s largest consumer goods maker is expected to drop from double-digits to 6-7.5 percent during the period, according to their reports.

The moderation in industry demand growth is visible in rural as well as urban areas, CLSA said in a recent report after its interaction with HUL.

High base of last year could result in moderation in volume growth for consumer goods makers in the next few quarters, according to Manyal. He was referring to a recovery in sales in 2018 after a tumultuous implementation of the Goods and Services Tax in 2017.

Still, the consumer goods makers are optimistic. “Yes, we may not see some of the benefits of past, where we came out of let’s say GST, but today it is business as usual,” Srinivas Phatak, chief financial officer at HUL had said in January.

Dabur’s Duggal expects consumption to pick up from the next month. “Consumption is lower than what it was in the last few quarters, but there is no underlying structural reason. I see things coming back to normal in the next few weeks,” he said. “If the summer is longer and hotter, then it will aid consumption of summer products. There would also be some cash flowing into the market consequent to the government schemes which will probably start end of this month or early April.”