Parle Products, India's leading biscuit maker, took Street by surprise on Wednesday after it said the company might lay off up to 10,000 workers as slowing economic growth and falling demand in the rural areas could lead to production cuts.
The comments come at a time when the Indian economy is grappling with a consumption slowdown. A slump has hit sales, forcing companies to curtail production amid hopes that the government will give an economic stimulus to revive growth.
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The four key reasons that are ailing the consumption sector in India, analysts say, are weak overall macroeconomic scenario including lower government spending, liquidity crisis that is hurting wholesalers, lower procurement despite minimum support price (MSP) hikes, and limited payout of the PM-Kisan scheme.
That said, analysts believe the ongoing phase of moderation in growth is temporary and expect the demand to revive in the coming quarters, from the beginning of the festive season in September.
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“The June 2019 quarter (Q1FY20) results demonstrate that most consumer companies are undergoing moderation in growth versus the consensus fear of slowdown in growth, as none companies have posted decline in volume/revenue,” wrote Naveen Kulkarni, head of research, at Reliance Securities in a results review note co-authored by Priyank Chheda. Consumer companies, they believe, are likely to see demand revival on the back of the ensuing festivities Ganesh Chaturthi and Onam (first week of September 2019) and Navratri (last week of September 2019).
Analysts at Centrum Broking agree. “Though the current consumption story revolves around a weak macro, we remain positive on distribution-led growth in rural areas post recovery in the wholesale channels which will be supported by a normal monsoon and recovery in liquidity conditions. Given the government’s unequivocal election mandate, we believe the strong focus on rural infrastructure and development, etc., augurs well for consumption,” they wrote in a note dated August 14.
On the financials front, companies in the consumer sector reported mid-single digit volume growth in the June 2019 quarter (Q1FY20). Demand environment remained subdued for the second consecutive quarter, while the management commentaries continued to remain cautious for the near-term.
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While companies such as Hindustan Unilever (HUL), Dabur, Asian Paints, Berger Paints, Pidilite Industries and Marico reported steady numbers for the quarter under review, that of Britannia Industries, Nestle (India), and United Spirits (USL) took a beating with prices of wheat, flour and sugar in inflationary terrain. High glass and Extra Neutral Alcohol (ENA) prices led to USL’s margin falling. Paint companies, however, did reasonably well, mainly owing to fall in crude oil prices.
At the bourses, Pidilite Industries, Asian Paints, Berger Paints, Nestle and Marico have gained up to 24 per cent on a year-to-date (YTD) basis. In comparison, the Nifty50 index has added nearly 1.50 per cent. On the flip side, Britannia Industries stock has shed 23 per cent while USL has lost over 9 per cent. Dabur India has seen a modest growth of 0.26 per cent during the period, ACE Equity data show.
So, what should you do with these stocks then? Among the lot, Asian Paints (Edelweiss, buy rating, target: Rs 1649); HUL, Dabur, Pidilite Industries (Motilal Oswal Securities, buy rating, target: Rs 1,280) and Marico are some of the stocks that most analysts are positive on.
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“We expect Dabur to generate revenue, PAT growth at 10.7 per cent, 10.1 per cent CAGR, respectively, on the back of strong volume growth of 7 per cent in FY19-21E. Hence, we maintain buy rating on Dabur with a target price of Rs 500," said ICICI Securities in a recent report. That apart, the brokerage is bullish on Marico and has a buy recommendation on the counter with a target price of Rs 425.
For HUL, analysts at Centrum Broking believe rural sales are key to revenue and given a weak macro may warrant further advertising & promotion (A&P) interventions. “Given HUL’s key categories are well penetrated (+90 per cent), it has little scope for distribution led growth, in our view. We maintain our estimates with an Add rating and discounted cash flow (DCF)-based target price of Rs 1,770 levels,” they said.