Poor rains may hit FMCG companies as well

The economic slowdown, which has so far hit cars, two-wheelers and consumer durables, is likely to spread to the fast-moving consumer goods (FMCG) sector, which has so far been able to keep its head above the water, according to leading brokerage Edelweiss Securities.

The brokerage, which interacted with 23 dealers and distributors from the Tier II and Tier III cities before arriving at its prognosis, said while demand has slowed down across the board, its was more pronounced in the drought affected regions of Maharashtra, Karnataka, Gujarat and Rajasthan. In the FMCG space, some segments have witnessed downtrading to lower stock keeping units, though consumers remain loyal to the brands. While the long-term growth story of FMCG companies is intact, slowdown in discretionary spends may extend to non-discretionary in the second half of the current financial year.

A study done by the brokerage said weak monsoon has also hit the defensive sector of pharmaceuticals as demand for acute therapy (anti-malaria, respiratory and anti-infective drugs) has come down. Positively, the chronic segment would continue to grow at a rapid pace. The growth momentum in domestic market is likely to sustain even as higher base effect in second half could dent growth. Edelweiss prefers companies having a strong chronic presence.

Most of the dealers remained hopeful of a pick up in the upcoming festive season which may bring in some cheer for companies in autos, FMCG and real estate sector. If the monsoon situation deteriorates further in September, it could dash such hopes and also affect winter crop.

Cement demand in India for FY13 is expected to grow eight-nine per cent but low industry capacity utilisation of 78 per cent for FY13 will continue to keep cement prices volatile.

The brokerage also believes that there exists ample scope for lowering wastage and improving productivity at various stages of the food-supply chain from sowing to distribution, the biggest being the lack of storage infrastructure. However, rising land prices are rendering the setting up of new warehouses unviable. Thus, food inflation can stay sticky in the near to medium term.