Chequered fortunes

 

A large part of the deceleration in consumption is coming from discretionary spend, even Q4 results of FMCG companies reflect a showdown in demand environment.

India’s high inflation and low income have slowed down the momentum of consumer goods-related stocks since start of May. Yet, some market strategists say that as long as these domestic uncertainties do not morph into another global panic, they could serve another purpose: to remind investors that the consumer goods stocks may be the best choice among a tough set of options. 

Visible slowdown

This may seem a difficult statement to make, after May’s sales report, which showed that the every segment of automobiles suffered a sharp deceleration in sales growth, except utility vehicles (UVs). Auto sales in India moderated in May with the country’s largest car makers Maruti Suzuki, General Motors, Ford and TVS Motor posting declines in their numbers due to post-budget price hikes, high interest rates and rising fuel prices. Hyundai Motor, Tata Motors and Mahindra & Mahindra, however, witnessed a surge in sales.

Maruti Suzuki India recorded domestic sales at 89,478 units, compared with 93,519 units in the year-ago period, registering a fall of 4.32 per cent. Rival Hyundai Motor India’s domestic sales grew by 2.85 per cent to 32,010 units from 31,123 units in the same month last year. Sales of petrol cars, which historically were the largest segment in India, have been falling as the widening differential between the partially decontrolled prices of petrol and the closely regulated price of diesel continues to widen to the disadvantage of the former.

Similarly, sales of consumer durable goods such as TVs and refrigerators have also turned sluggish. Fast- moving consumer goods (FMCG) are still doing well, but, they are available only at valuations that are well above broader markets. Export growth is also slowing. Therefore, despite the falling rupee, investors cannot really look at exporters for outperformance. The premium being enjoyed by defensive stocks can be seen for cigarettes for FMCG giant, ITC, which now is witnessing the largest weightage in the widely followed NSE Nifty index.

Weak results

Experts pointed that the fourth quarter performance of FMCG sector was better against consumer discretionary sectors, which have shown early signs of slowdown. In terms of volumes, where demand FMCG remained stable, consumer durables and discretionary sectors faced headwinds, experts pointed.

Dhananjay Sinha and Kashyap Jhaveri of Emkay Global Financial Services, said, “A large part of the deceleration in consumption is coming from discretionary spend even as Q4 for financial year 2012 results from FMCG companies suggest resilience. Indicators for discretionary spending are disappointing. Credit growth for consumer durables in April 2012 was down 17 per cent (y-o-y) and data on domestic sales of car and two-wheelers, air conditioners, refrigerators and washing machines are showing contraction.”

On car sales, Dipojjal Saha, research analyst of Edelweiss Securities in a research report dated June 4, said, “Companies facing sales slowdown undertook cost rationalisation measures, results of which were visible in Q4FY12,”

Outlook

Sudip Bandopadhyay, managing director and chief executive of Destimony Securities, expects increased consumption of both consumer durables and non-durable items despite a marginal slowdown in demand. “Efficient FMCG and automobile companies catering to the mass market in semi-urban and rural India will continue to show exponential growth during the next three-five years,” said Bandopadhyay. He expects the global liquidity scenario to remain favourable, which in turn will support Indian markets.

Sunil Mishra, CEO of Karvy Private Wealth, expects healthcare and consumer goods companies to report impressive earnings growth on the back of monetary easing, global flows and a bounceback in GDP growth.

Meanwhile, Sonal Varma, chief economist at Nomura India, believes 50 basis points of additional repo rate cuts in 2012 due to continued weakness in domestic demand and moderate core inflation, with a 25 basis points cut at the policy meeting on June 18.

Stock performance

Yet, even with the slowdown, consumer stocks that broadly include FMCG, consumer durables, automobile and retail shares, have so far outperformed the broader market year-to-date. The BSE FMCG Index has jumped 16.21 per cent so far this year with shares such as Jubilant Foodworks, Godrej Consumer Products, United Spirits and United Breweries climbing 60.35 per cent, 45.38 per cent, 27.44 per cent and 26.72 per cent, respectively. ITC, Marico and Colgate-Palmolive and Nestlé rose between 15 per cent and 18 per cent at a time that the BSE Sensex gained a mere 8.43 per cent.

Auto shares such as Tata Motors and Maruti Suzuki climbed 33.8 per cent and 22.06 per cent, respectively, during the period.

“We are playing consumption theme through Maruti Suzuki and Amara Raja in auto and auto ancillary sector and ITC & GlaxoSmithKline consumer products in Consumer staples Sector,” said Ajay Bodke of Prabhudas Lilladher in the India Strategy note.

However, two-wheeler maker Hero MotoCorp added just 5.24 per cent, while Bajaj Auto declined 4.02 per cent during the period.

Among the retail shares, Pantaloon Retail is up 29.7 per cent, Shoppers Stop is up 12.65 and Trent is up 5.03 per cent, year-to-date.

Sales performance of auto majors in the present year mirrors a similar pattern since the end of 2011-12 as signs of inflation, interest rates and high cost of fuel kept customers away. In 2011-12 itself, growth in the so far rapidly-growing market for cars, trucks and buses, slowed down to just 4.72 per cent.

“In an environment marked by panic, investors will continue to fall back on consumer stocks considered as a safe haven at a time of slowing growth,” said Kaustubh Pawaskar, research analyst at Sharekhan. 

Source : http://wrd.mydigitalfc.com/companies/chequered-fortunes-678