Demand trends remain tepid across many of the consumption-driven sectors. The operating performance of Indian Corporate Sector has been under pressure over the past couple of years driven by a host of factors. While structural challenges across many of the infrastructure sectors, high-indebtedness of large corporate groups and global commodity meltdown have had the most pronounced impact, anemic trends across consumption-driven sectors have also contributed to weak corporate sector performance. Although the previous fiscal year began with some optimism and witnessed gradual recovery in urban demand, challenges on the rural front (i.e. weak monsoon, subdued hike in MSPs) and lower than expected scale-up in Government spending ensured that demand sustainability was elusive. Following another year of below-average rainfalls and slower than expected recovery in the economy, the demand off-take has been fairly tepid during H1 FY 2016 as well across many of the consumer-oriented sectors. In addition, the spreading up of the festive season over two quarters (i.e. Q2 and Q3) during the current fiscal vis-à-vis the previous year has also impacted the relative performance of various sectors.
In the following report, besides regular sectoral commentary, we have done a special focus on consumption driven sectors, ranging from Passenger Vehicles to FMGC. ICRA analysis suggest that barring some recovery in domestic Passenger Vehicle sales, which have been supported to a great extent by new model launches, the scenario remains fairly weak across sectors. Moreover, the impact of rural distress is also visible in many of the sectors which have sizeable exposure to rural regions (i.e. motorcycles, FMCG etc.).
Although some trends suggest that urban recovery has been underway but many of urban-oriented sectors (i.e. retail chains, quick service restaurants etc.) are yet to see sustainable improvement. Some of the listed players in the Consumer Durable sector too have reported relatively lackluster performance despite aggressive marketing/promotional initiatives by ecommerce platforms and softening interest rates. Besides weak consumer demand, some of the sectors have also been adversely by industry-specific issues.
Discretionary Sectors: Recovery in domestic PV sales is supported by new model launches As Ironic as it may sound, some of the large discretionary sectors like Passenger Vehicles and Retail Jewellery have actually performed better during the current fiscal. For instance, domestic PV sales have grown by 8.9% during 8m FY 2016 compared to a growth of 3.9% in FY 2015 and gold consumption too is up by 4% during 9m CY 2015 compared to the previous year. We believe that the recovery in the PV sales is primarily supported by slew of new model launches and only partially by favorable trend in cost of ownership (i.e. lower fuel cost and EMIs).
Discretionary Sectors Gold demand is up owing to low-base effect and soft prices Likewise, the optical recovery in gold consumption also takes into benefit the impact of low-base when gold availability was adversely affected by imposition of mandatory export restrictions. Along with the sharp increase in import duty on gold, the ‘20:80’ policy (which mandated jewellery manufacturers to export at least 20% of their overall production) was implemented to restrict gold imports and reduce India’s current account deficit (CAD). As a result of these measures, the availability of gold declined considerably between H2 CY 2013 and H1 CY 2014, thereby resulting in a decline of 1% in gold demand during CY 2014 compared to almost double digit growth in the prior year (i.e. CY 2013). In addition to low-base, the gold consumption during the current year has also been supported by softening gold prices notwithstanding the challenges on the rural demand front like crop damage in Q2 CY 2015 due to unseasonal rains and weak monsoon.
FMCG: Recovery in urban markets have helped to offset rural slowdown to some extent With most of the FMCG companies generating a sizeable proportion of their business from rural markets, the impact of rural stress has also been highlighted by FMCG players over the past few quarters. Nonetheless, companies have reported fairly stable volume growth over the past few quarters driven by new product launches, foray into new segments, price cuts and aggressive promotion/marketing initiatives. In general, most of the companies indicated that growth momentum in modern trade (which typically represents urban markets) and CSD formats is higher than that in rural markets. For instance, HUL indicated that rural growth which was earlier running at 1.5x the growth in urban markets has now come down to almost the same level. Dabur India also indicated that challenges in the semi-urban and rural markets are also with tight liquidity situation.
Alcoholic Beverages: Industry specific challenges outweigh weak consumer demand During the current fiscal, the alcoholic beverages industry has also witnessed relatively subdued trend in volumes compared to the previous year. However, unlike many of the other consumer-oriented sectors, the prospects of the alcoholic beverages industry have been more influenced by industry-specific developments rather than by weak consumer sentiment. Apart from regular hike in duties by many of the states, the change in procurement policy in Tamil Nadu (second-largest market for beer in India) and supply disruptions in Odisha (due to disagreement between manufacturers and state agencies on pricing) have affected industry volumes during H1 FY 2016. In addition, some of the national-level companies have also restricted their focus on mass-brands (owing to low profitability), which has also contributed to lower volume
Retail Chains: Growth remains stable across non-discretionary formats; Onslaught of e-commerce platforms showing up in some business models With muted demand trends, the organized retail chains have also been reporting low-single digit growth in same store sales. Moreover, the businesses, which are more focused on discretionary segments (like Shopper’s Stop, Pantaloon etc.) have seen greater impact of subdued consumer sentiment vis-à-vis retail chains that generate a higher proportion of sales from grocery segments. In addition, they have also been facing the onslaught of aggressive discount-led push by e-commerce players. However, most of retailers/brand owners are gradually gearing up for co-existence with the e-commerce players.
Quick Service Restaurants: Yet to see sustainable improvement in demand The demand scenario has also been fairly weak for Quick Service Restaurants (QSRs) with most of them reporting a steady decline in same store sales for almost 7-8 quarters beginning from H2 FY 2014. Although some improvement was visible in H1 FY 2016, but in general, management commentary remains fairly cautious with factors like promotional activities and change in product mix attributed to recent pick-up in sales.
Outlook: All eyes are now set on fiscal stimulus measures Having gone through another year of relatively tepid growth even after incorporating the recent pick-up in festive season, the outlook over the near-term clearly hinges on a whole host of fiscal stimulus measures such as implementation of seventh pay commission, OROP, hike in MSPs and relief initiatives for draught-hit states among others. However, we believe that some of these measures will have limited impact and the overall recovery is likely to be gradual. For instance, in absence of arrears (owing to timely implementation), the seventh pay commissions’ 24% hike in salaries would have muted impact on disposable incomes of government employees.
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