Consumer Goods Earnings Show The Indian Consumer Is Yet To Loosen Purse Strings

Weak consumer demand continued to weigh on volume growth of fast-moving consumer goods (FMCG) companies in the July-September quarter, even though a pick-up in premium product sales across categories came to the rescue of some firms. The personal care category was the weakest during the quarter while the food segment showed some strength.

Volume growth across listed fast-moving consumer goods companies varied from a low of (-)1 percent to a high of 10 percent during the quarter. This was wider than the range of 5-10 percent volume growth seen during the same quarter last year. This is reflective of an economy where urban demand has remained stronger than rural demand.

“We note that economic recovery is still quite patchy with only parts of urban discretionary consumption holding up well. The ongoing results season has not provided any signs of an incipient economic recovery and management outlook on demand for the next 2-3 quarters is generally subdued,” said Kotak Institutional Equities in a report on 1 November.

Hindustan Unilever Ltd. (HUL) reported the weakest underlying volume growth during the quarter due to sluggish sales in the personal care category which is the largest contributor to the company’s revenue. Emami Ltd. reported the highest volume growth helped by its 2015 acquisition of hair care brand Kesh King and strength across other key products.

Segments Driving Growth

In contrast to the broader trend, the food category showed strength and led growth during the quarter. A shift from unbranded to branded goods in the segment led to a pick-up in food product sales, said Vijay Udasi, senior vice president at Nielsen India.

Dabur India benefited from this trend and saw revenue from food business rise 9.4 percent to Rs 269.72 crore due the quarter.

HUL reported a 2.4 percent increase in revenue from the food segment while refreshment segment revenue rose 8.4 percent to Rs 1,169.17 rupees during the quarter. The Indian arm of the Anglo Dutch consumer goods major also benefited from the launch of premium variants across the Bru and Kissan brands.

The premiumisation strategy worked for other companies as well.

In the July-September quarter, Marico reported healthy volume growth for Saffola refined edible oil (eight percent) and value added hair oils (11 percent).

Segments Under Pressure

The personal care category was the worst hit this quarter as discretionary spending, particularly in rural markets, remained weak.

Udasi explained that consumers have been holding back on spending in the personal care segment. Two years of drought has led consumers to become more judicious in their spending habits, said Udasi.

An example of this was the weakness in hair oil sales during the quarter. Marico reported a 6 percent decline in volumes in its Parachute rigid oil (oil sold in bottles) category.

In a post earnings conference call with analysts, Sunil Duggal, chief executive officer of Dabur said that sales across the hair oil category have been slow since the product is largely dependent on rural sales.

Dabur’s hair oil category saw flat volumes during the quarter while the segment saw a degrowth of 6 percent in value terms.

Optimistic Outlook

Despite a weak quarter, executives at FMCG firms struck an optimistic note while commenting on the outlook for the remainder of the financial year.

“With good monsoon, we expect a gradual improvement in market demand and remain positive on the mid-long term outlook for the industry,” said Harish Manwani, chairman of HUL in the company’s earnings press release.

Marico, in its post earnings release, said that it continues to target volume growth of 8-10 percent and topline growth of 12-15 percent over the medium term.

“The medium to long-term prospects, particularly for India, remain robust and we are optimistic that domestic consumer demand would gain pace in months to come, riding on good monsoons and a slew of government initiatives announced recently,” said Dabur in its earnings press release.