Despite slump in economy, consumer goods companies perform well

Agencies, Aug 22: India’s largest biscuit maker Parle Products has said it may have to lay off up to 10,000 employees if the consumption slowdown persists. Parle’s rival and listed company Britannia Industries Ltd had earlier said, while announcing its June quarter results, that consumers are thinking twice before buying even a Rs 5 pack biscuit.

Severity rate
“There is some underlying demand slowdown, for sure, but the deceleration is not as sharp as the reported growth comps suggest,” said analysts at Kotak Institutional Equities in a 20 August report. According to analysts at Edelweiss Securities Ltd, “Consumer staples’ volume growth was relatively resilient in Q1FY20 despite the slowdown brouhaha.”

While sales growth of consumer discretionary firms has declined, these firms are still growing at a fairly decent pace. Asian Paints Ltd, for instance, reported 17 per cent increase in volumes in the June quarter. The volume performance of consumer staples firms in the June quarter shows that some companies have fared better compared to others. For perspective: Hindustan Unilever Ltd (HUL) clocked volume growth of 5 per cent, moderating from the March quarter volume growth of 7 per cent. Volume growth for Marico Ltd, Godrej Consumer Products Ltd, Dabur India Ltd and ITC Ltd were 6 per cent, 5 per cent, 9.6 per cent and 3 per cent (estimated), respectively.

Showdown, slowdown
“Dabur is generally seen as the stock to play the ‘rural’ theme and here, we have the company report the highest growth (off a high base; so, no base benefit) in a quarter where nearly all companies suggested a sharp rural slowdown,” wrote Kotak analysts. While announcing the June quarter results, the HUL management said the rural market, which was earlier growing ahead of urban, is now growing at par with it. This trend was highlighted in the previous quarter as well.

Of course, the slowdown has cast a shadow on consumer stocks. The Nifty FMCG index has underperformed the Nifty 50 so far this calendar year. Besides, management commentary during the earnings calls wasn’t upbeat on near-term demand. However, some expect the demand situation to improve in the second half of the year aided by a good monsoon and government’s inclination to improve rural fortunes.

“We believe, demand will pick up from Q4FY20 (even companies believe so) once payouts under direct transfer schemes and better monsoon lead to more money in the hands of consumers,” said Edelweiss analysts in a 20 August report. That said, until investors see visible signs of a revival in demand, investors can be expected to hold on tightly to their purses.