Sweet chin music for India Inc

By ZRG | Last Updated: Friday, October 12, 2012 - 17:42

Rohit Joshi/Zee Research Group

While the slowdown on the investment side is well known, a new worry is the possibility of a greater-than-expected deceleration in the consumption side of the economy. The sales of two-wheelers already indicate a slowdown, and moreover recent quarterly results of discretionary consumer companies indicate a similar deceleration.

Interestingly, India`s biggest fast food restaurant chains like McDonald’s, Jubilant Foodworks (which run Domino’s Pizza) have reported slower growth in same-store sales during April-June than earlier quarters. The trend is also apparent in the other consumer discretionary space ranging from paints to lifestyle retail chains to jewellery during the first quarter of the current fiscal (2012-13).

Industry experts are keeping a tab on the slump in the discretionary consumer space. A K Prabhakar, Senior vice president, equity research, Anand Rathi Financial Services, said, “Discretionary consumer space is witnessing some concerns and the business cycle is going through challenging times. However, with the kind of lifestyle people are accustomed to, the demand for these products can’t be totally avoided though they can be postponed for a while.”

Zee Research Group (ZRG) profiles those companies in this space which have witnessed slowdown in the first quarter. Jubilant Foodworks posted lower same store sales (SSS) growth of 22.3 percent as against 36.7 percent in the corresponding period last year.

Furthermore, management expects SSS growth to come down to 18 percent on account of slowdown. Similarly, McDonald’s India has also witnessed SSS growth dropping to high single digits in April-June from double digit growth last year.

Asian Paints results came below market expectations. Earlier price hike, coupled with slowdown in overall demand, pressured paint volume growth leading to lackluster domestic volume performance in the quarter. Adding to the woes, Hero Motocorp’s management admitted that inventories have risen to four weeks from the normal level of two weeks.

While Titan‘s jewellery volumes have declined 21 percent due to high gold prices and slowdown in consumer demand, India’ leading retailer, Pantaloon Retail has also posted dismal results in this quarter. SSS growth in home retail business has witnessed a degrowth of nearly 1 per cent along with a flat growth of 0.4 percent in value retail.

Explaining the rationale behind the poor results, Rakesh Biyani, Joint MD, Pantaloon Retail, stated, “There is a clear slowdown in the country. We are seeing fewer customers actually walking in to our stores, there is no growth in the footfalls. Purchase in categories like computers, furniture, home decorators is getting impacted by the slowdown. So all in all, economic slowdown and muted consumer confidence has impacted the business negatively.”

In a scenario when there is pressure on consumption and people are beginning to hold back spending, McDonald`s India, has slashed product prices by 6 – 15 per cent in order to accelerate sales even it means lower margins. It seems that similar sort of strategy is being adopted by Biyani of Pantaloon, who asserted, “We are working more efficiently to bring down prices across product categories and adding new products to our portfolio.”

Commenting on the outlook going forward, Biyani opined, “We expect no change in the sentiment of the economy in the near term. We need to go back into investment mode which is currently getting impacted by higher interest costs and policy paralysis. This uncertainty needs to be addressed as many people seem to be worried about their investment decisions.”

Biyani’s thought got an endorsement from Prabhakar at Anand Rathi, who averred, “Going forward, on the back of slowdown, the topline of these companies can witness some pressure. However, the business of these companies is seasonal in nature with second and third quarter being generally good. That is a festival time in India when many retailers do give discounts to customers which in turn help the demand to spur.”

“Stocks related to consumer discretionary space have already priced in these concerns and therefore we have seen correction in most of the stocks. However, we do expect that two quarters down the line demand would slowly pick up which would ultimately get reflected in the topline of these companies,” he added.

The initial phase of deceleration in consumption was evident in discretionary spending but the cycle is now expected to move towards FMCG companies. Declining consumer confidence levels has impacted urban consumption, while the deficient monsoons could further impact rural consumption.

However, consumer staples (FMCG Basket) has been able to shrug off the slow down during the first quarter. Most Companies in this sector have posted volume growth above the street expectations. However, poor monsoon could certainly affect the volume growth in the coming quarters. Various management across the industries in the conference call have cautioned about the outlook and reiterated the fact that the macro environment still appears gloomy and the next 2 -3 quarters are going to be quite challenging.

“High value (premium) products in FMCG space will get impacted by the slowdown,” cautioned Prabhakar.



First Published: Friday, August 24, 2012 - 14:36

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