Monsoon season and cash handouts keep BNP Paribas bullish on FMCGs

It’s not all gloom and doom for consumer companies, and BNP Paribas says plentiful rainfall seen this monsoon season and cash handouts to farmers will help revive demand from a multi-year low.

Sales of staples will recover in the second half of the fiscal year that began April 1, as farm-support measures and above-average rain lift rural incomes, the brokerage said in a report.

“A good monsoon tends to have a mid- to long-term impact on consumer spending, and not necessarily in the near term,” Abhiram Eleswarapu, head of equity research at BNP Paribas Securities India, said by phone. “Right now, we’re seeing a lot of gloom with regard to the consumer sector.”

India’s slowdown and a simmering shadow banking crisis have begun to hurt makers of even low-ticket fast-moving consumer goods. The sector’s revenue growth in the year to March is likely to be the worst in 15 years, Credit Suisse Group said in a note this week.

BNP’s outlook also relies on the Reserve Bank of India’s consumer confidence survey that indicated consumers are looking to reduce non-essential spending but are expected to maintain or increase purchases of daily necessities.

The brokerage is bullish on Dabur India, which produces toothpaste, fruit juices, and hair oil maker Marico to play the expected recovery in rural demand. And Jubilant Foodworks, a distributor of Domino’s Pizza and Dunkin’ Donuts in India, is its urban consumption pick.

But what about discretionary spending by consumers?

“Discretionary spending, as a whole, could remain weak,” Eleswarapu said. “That said, select categories like quick-service restaurants, paints and jewellery seem to have held up better than others.”