Consumption unlikely to hold up
Slowing growth, inflation and poor monsoon may hurt
Production cuts by auto makers, advancing of sales by retailers and low or no salary rises by companies are going to be a drag on consumption. Analysts are viewing these as signs of a secular slowdown in consumption, which has held up all through FY12. It was the only component of the gross domestic product that held on, albeit at a slower pace of six per cent, despite raging inflation and high interest rates. But this last bastion will not remain unscathed by slowing growth and economic uncertainty. Manishi Raychaudhuri of BNP Paribas, believes consumption growth is unlikely to return to its seven to eight per cent growth and the halcyon days are clearly over.
Concerns on consumption have emerged over the last few days on fears of a potentially weak monsoon. Analysis says in four years out of 12, when monsoon has been deficient, consumption of automobiles and staples has collapsed. Sales data of retailers and auto companies suggest there is a slowdown. Though sales of consumer staples are holding on, this may not last in the coming quarters. While a three to four per cent slowdown in sales is not a disaster, CLSA says, investor focus on cash-flow and balance sheet has taken the sectoral valuation to an all-time high P/E premium of 109 per cent against 57 per cent, as the average for the last 10 years. “The premium valuations make the sector less defensive,” the brokerage adds.
Besides deficient rains, a high fiscal deficit has left the government with little ammunition as far as public spending is concerned. Increased supply of foodgrains has led to lower realisations for the farmers, even though support prices have gone up. According to Dhananjay Sinha of Emkay Global, in FY12 the average cash cost of cultivation went up 15 per cent, while net cash realisation (for marketable surplus) fell 10 per cent. Hence, the net cash flow is down 35 per cent in FY12. Less money in the hands of the farmer implies lower spending. This pattern is visible in declining sales of tractors and decontrolled fertilisers and new mobile subscriber additions. Addition of GSM connections in circles B and C fell 23 per cent y-o-y in Q4.
Analysts say the market is currently not factoring in such a slowdown in the prices of consumer stocks. The relative price/earnings multiple of consumer companies is at a peak compared to the Sensex P/E.