India’s Consumption Slowdown May Not Be That Bad

Weaker growth can be blamed on weaker demand, but only partly. The other key reason is a high-base—or stronger-than-usual sales numbers in the year-ago period when the nation was emerging from the disruption caused by the cash ban and the goods and services tax. That impact has now faded away and growth seems to be reverting to historical levels.

That’s reflected in the average volume growth at four large makers of staples to shampoos—Hindustan Unilever Ltd., Britannia Industries Ltd., Dabur India Ltd. and Godrej Consumer Products Ltd. Sales volumes rose nearly 5 percent on a yearly basis in the quarter ended March. That’s the weakest growth since April-June 2017. While the pace has fallen in the last three quarters, the numbers are not too different from what the industry reported before demonetisation.

Prime Minister Narendra Modi’s decision to scrap 86 percent of the cash overnight in November 2016 squeezed demand. While the nation was yet to recover from this, his government went ahead with the implementation of a nationwide sales tax that subsumed a web of levies. Dealers pared inventory ahead of the July 2017 rollout of GST fearing losses, and volumes again declined.

The fast-moving consumer goods industry emerged from the fallout of twin disruptions in July-September 2017. The volumes jumped and remained elevated for almost five straight quarters. Then, starting July-September 2018, growth started to revert to pre-demonetisation levels.

“On such high bases [of five quarters], achieving double-digit volume growth quarter-after-quarter is not plausible considering the size and distribution reach of those companies,” Edelweiss Securities said in a March 29 report. “On a two-year average basis, we expect volume growth to decelerate. Considering the high bases as well as slower government transfers, we expect the Q1FY20 volume growth to also remain subdued.”

Can’t Ignore Slowdown

The base impact doesn’t mean there is no slowdown. India’s GDP growth has slowed, pulling down overall consumption data. Agrarian distress is hurting rural demand. And, non-bank lenders’ struggle to raise funds after the surprise defaults of IL&FS group caused a liquidity crunch. Other indicators like auto sales only reinforce the fall in demand. BloombergQuint flagged these issues in March and consumer goods makers acknowledged that this earnings season.

Rural demand moderated from about 1.3 times the urban consumption to 1.1 times in the fourth quarter, HUL said in its earnings conference call. India’s largest consumer goods maker is considered a bellwether of consumer sentiment.

The Dabur management said after its earnings announcement that their base case is a continuation of 8-10 percent volume growth. The bull case is double digit growth on the back of stimulus and disposable income increases.

Nielsen India estimates the FMCG industry to grow at 11-12 percent in 2019, about 200 basis points slower than 2018. Macro-economic factors like inflation and GDP growth, rural consumption and a high base in the second half of 2019 are likely to impact demand, it said.

Near-term triggers for revival will be monsoon and a stable government at the centre, Varun Berry, managing director at Britannia, said in a statement accompanying the earnings filing.

Stocks Down

The Nifty FMCG Index has fallen 4.2 percent so far this year with all its constituents—except Procter & Gamble Hygiene and Health Care Ltd. and ITC. Ltd.—trading lower. But the stocks are still not cheap. HUL, Britannia, Dabur and Godrej Consumer still trade at 37.5 to 50.8 times their earnings, higher than their five-year average.

“Consumer goods companies have corrected from their high in the recent times. The recovery in demand will take time as normal monsoon and stable government at the centre will improve the consumer sentiments in the coming quarters,” Kaustubh Pawaskar, senior research analyst at Sharekhan, said. The second half of the ongoing financial year will give a clear indication on how consumption is shaping up, he said, adding that the long-term growth story of Indian consumer market is intact.