Consumer, Industrial Firms Expect Slowdown To Continue For A Few More Quarters

India’s consumer-focussed and industrial companies, considered bellwether sectors for the economy, expect the economic slowdown to continue even as managements remained hopeful of a recovery in the next few quarters.

Sectors such as fast-moving consumer goods, home development, capital goods, infrastructure and consumer durables continue reeling under the slowdown, according to a BloombergQuint analysis of earnings and management commentary on the June-ended quarter (Q1FY20).

Only seven Nifty 50 companies beat consensus estimates in the first quarter as a prolonged slowdown not only weighed on the first quarter earnings but also made businesses cautious about the future. This was the worst performance in at least three years.

Consumer Goods Makers

Management commentary from consumer companies has traditionally been a powerful indicator of demand. Moderation of volume growth, according to UBS Analyst Sunita Sachdev in her latest report, is one of the key trends in the first quarter results of consumer goods makers.

Volume growth fell from the previous quarter and there was a marked slowdown in the rural consumption - its now growing at the same pace as the urban segment - showed the earnings of consumer goods makers.

Companies in the home and personal care segments expect the economy to recover in the second half of the year. Food-based companies were less sanguine and pointed that the trends have turned cautionary and the slowdown is expected to continue in the next few quarters.

Paintmakers were the among the few outliers after they beat estimates in the quarter ended June. Double-digit volume growth in domestic decorative paints business was aided by inventory buildup ahead of the festive season and a low base. But they too remained cautious on demand outlook.

Outlook for the rest of the year based on conference call and management interviews:

• Asian Paints: Cautious on demand in view of a challenging economy and below-average monsoon thus far.
• Berger Paints: Difficult to measure demand, and outlook depends on monsoon.
• Britannia: Recovery within six months; slowdown possible in the next two-three quarters.
• Colgate: Hopeful of a pick-up in the coming quarters.
• Dabur: Appears more conservative owing to modest market conditions. Retained full-year guidance.
• Emami: Hopeful of a recovery in the second half of FY20 but has taken a pause on launches until the macro environment improves.
• Godrej Consumer: Management remains confident about a gradual revival in demand. Expects the top line growth to revive only in the second half.
• HUL: Expects improvement in the second half of the year led by government efforts.
• Nestle: Expects “period of low growth” but won’t be as much impacted from the slowdown as rural exposure is relatively less as compared to other players. The company is among the rare few to announce investment in a new manufacturing facility.

• ITC: Overall slowdown in the market persists but sees rural growth reviving on a better monsoon.
• Jubilant Foodworks: Cautious approach on demand outlook.
• Marico: Liquidity issues are impacting channels but is hopeful of a recovery in the second half.
• Pidilite: Remains cautious, but expects conditions to improve.
• Titan: Growth in first half of the year likely to undershoot guidance, and shortfall won’t be made up in the second half.
• United Spirits: Demand outlook uncertain given the broader economic slowdown.

Consumer Durables

The appliance and electronics makers performed better than makers of staples to shampoos as urban demand remains relatively resilient despite uncertain rural conditions. An intense and prolonged summer aided air conditioner and refrigerator companies. But the real estate and construction slowdown hurt makers of switches, lights and electricity cable.

Outlook for the rest of the year based on conference calls and company interviews:

• Voltas: Channel inventory eased close to normal levels after sale of old stock.
• Blue Star: Macro-economic conditions are weak and visible signs of a slowdown in demand.
• Havells: Construction slowdown and a delay in fresh government projects impacting sector.
• V Guard: Didn’t change its 15 percent top line growth outlook despite the weak first-quarter earnings.
• Crompton Consumer: Confident of growth in the medium term.

Industrials

Industrial and construction companies too indicated a subdued economy and order book moved solely on account of government orders. The much-needed private capex boost remains missing.

Analysis of financials for the quarter-ended June showed margins were under pressure across the board with companies highlighting competitive pressures and weak order inflow trends. Working capital was under pressure because of tight liquidity. But that’s expected to have eased in July/August.

Here’s the outlook for the rest of the year based on conference call and management interviews:

• ABB: End markets remain sluggish and growth is being aided by exports.
• BHEL: Reported operating loss because of continuing execution challenges.
• Cummins: Cut domestic and exports guidance due to the slowdown.
• KEC International: Expressed concerns over bleak order intake.
• Larsen & Toubro: Expects private sector capex to be subdued in the next few quarters.
• NCC: Expects a flat revenue growth in FY20.
• Siemens: Sees a slowdown in capex-related ordering both on private and government side as liquidity is becoming a concern.
• Thermax: Cited weak outlook on the back of poor order flow.