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No green shoots, FMCG demand failed to thaw in winter: Nitin Gupta, SBICAP Securities

Marico, HUL and other companies which have offered price sops are placed well in the market. Whatever steps the government has taken, have not manifested in growth as of now. While some of the pass throughs happened through tax rate cut where the government’s intention was to incentivise the companies to invest more.

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Last Updated: Jan 24, 2020, 02.51 PM IST
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Nitin Gupta, SBICAP Securities-1200
Slowdown in FMCGs is culturally driven where after implementing demonetisation and GST, that cultural shift in the way of doing business is affecting trade, says Nitin Gupta, Lead FMCG, SBICAP Securities. Excerpts from an interview with ETNOW.


Where do things stand when it comes to consumption? It seems that niche consumption stories within the mid affordable segment continue to be completely untouched by the slowdown?
In the FMCG sector, we are seeing six-seven trends in the near term. First is the rural slowdown. It has remained slow and even the Nielsen data is highlighting that in Q2, rural growth has gone down from 5.3% to 5.2%. So that way, rural is stable. But we are observing four stages of rural slowdown. The first stage is they seek more value from the existing money. Second stage, they want to cut down spending. Third, they are looking to cut down on discretionary consumption and four, they will downtrade to unorganised sector.

In the first phase, we have observed that companies have gone through increased promotion and that has played out well. In the second stage, we are observing that most companies are cutting down on prices with tactical price sops; a case in sight would be Marico, HUL and other companies which have taken price sops tactically and that is placed well in the market.

The third stage is discretionary consumption cut down which we have observed in select categories or companies like GCPL, Emami. Most of it is positive and if the demand is stabilising at this level, then rural is placed well and that consumption slowdown will continue in the near term. So this was mainly the rural slowdown.

Second is the premiumisation trend that we have observed. The urban affluent class is consuming well and is continuing to do well. A case in sight is while Future Consumer had to close down Easyday stores, Nature Basket from Godrej moved to Goenka Group. That itself suggests that overall, the premium affluent class is doing well and there the demand has remained robust. FMCG companies in the last three-four quarters have also tried to launch low unit packs of premium portfolio which is also placed well and that is helping their overall margin trajectory.

The third part would be for this quarter only and this winter is crucial. According to Nielsen data, in October, there is recovery in growth for the FMCG sector, but towards the end of the quarter, they are highlighting a further growth deceleration. That suggests that November and October are weak and based on our channel checks, we got to know that winter was intense towards the end of December. So, as such, the prime sales data have come but secondary sales have not happened in November and half of December.

Companies like Emami and HUL are likely to be impacted because of this. On the contrary, Dabur has played out this trend well and their chyawanprash, honey did well and they have also leveraged the opportunity of pollution in north India well. So winter overall has decelerated demand in November and December.

The fourth part would be the international segment. Across all FMCG companies, at least for this quarter, we are expecting the international business to be relatively better than the domestic one given the high single digit constant currency growth with some positive mix of the currency effect. That is how for this quarter, stable and urban centric FMCG companies should do well and given international growth, may see some improvement also.

Would you be able to quantify the kind of pick up in growth that you are expecting?
Based on our channel checks and interaction with the multiple companies that we have observed, there are no green shoots but this slowdown is culturally driven where after implementing demonetisation and GST, that cultural shift of the way of doing business is affecting trade. That will get sorted out and hopefully stability will return. Nielsen is projecting 9-10% growth for next year. That is feasible but as we are aiming for a $5-trillion economy and if we believe that GDP growth will improve, rural should also improve. If the rural economy improves, we will have to see which all companies are placed better and how they can extract better growth. But there are no green shoots as of now

Whatever steps the government has taken, have not manifested in growth as of now. While some of the pass throughs happened through tax rate cut where the government’s intention was to incentivise the companies to invest more. That decision will come into effect with a lag, maybe in this year’s annual general meetings, companies will take a call whether to go for capex or not.

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