Much was expected from the Budget for speeding up the economic rate in terms of a consumption boost. After all, putting more money in the hands of the common man would result in increased demand for goods, which in turn would improve capacity utilisation of companies and get them to invest to meet the demand.

But the B-day delivered no short-cuts that could directly make consumers cash-rich.

Consumer companies are now left to their own devices to regain their mojo. How are the firms faring? Are there any tailwinds at this point in time which would help recovery?

In first gear

Constituting 50-60 per cent of the GDP (Gross Domestic Product), Private Final Consumption Expenditure (PFCE) is a key driver of economic growth.

While this component grew by 8.1 per cent in 2018-19, growth in the first half of 2019-20 halved to 4.1 per cent.

If FMCG consumption can be considered a proxy for overall consumption growth, data from market research firm Nielsen show that growth rates have declined progressively over the past year.

Rural consumption, which grew by 18 per cent in the December 2018 quarter, dwindled to just 5.2 per cent in the three months ended December 2019. Growth in urban consumption dropped to 7.4 per cent as against 14 per cent a year ago. This is reflected in the volume numbers of FMCG companies in the past few quarters.

FMCG behemoth Hindustan Unilever, for instance, recorded only a single-digit volume growth of 5-7 per cent in all the four quarters of 2019 calendar year, compared with double-digit growth in the four quarters of calendar year 2018.

For many players, rural sales have grown at only half the pace of urban sales in the last few quarters, unlike in the past where it grew 1.5 times urban sales.

New vehicle sales, too, have been in the red. The slowdown, which began in the second half of 2018-19, became well-entrenched this fiscal. The overall sales volumes for April-December 2019 dropped 16 per cent from the figures in the same period last year.

January volume trends, too, are on similar lines.

Media companies such as Zee Entertainment have seen growth in advertising revenues — which constitute about 55 per cent of its total revenues — deteriorate. Ad revenues for the company, which grew at a healthy 21.7 per cent y-o-y in the December 2018 quarter, worsened since then to show a 15.8 per cent fall in the quarter ended December 2019. Asian Paints has kept volumes growing due to customers down-trading to pocket-friendly products. In the process, the value growth for the company has taken a hit. In the three months ended December 2019, the company recorded a revenue growth of only 3 per cent, the slowest since the time of demonetisation and GST changeover.

The overall slump is reflected in the performance of the Nifty Consumption Index. The index gained 5.1 per cent in the last one year, as against the 9.1 per cent gains of the Nifty 500 and the 10.9 per cent rise in the bellwether Nifty 50.

Revenue growth for the 30 companies across sectors that constitute the index (such as automobiles, FMCG, consumer durables, telecom, media and retail), stood only at 2.1 per cent y-o-y for the first half of 2019-20, compared with the 21 per cent growth in 2018-19. Profit growth (excluding telecom) in the first half was, at best, flat year-on-year.

Slow growth in rural and urban incomes is among the key reasons for the shrinkage in demand. Problems in availability of finance due to a liquidity crunch in the lending machinery is another.

This has not only affected vehicle and consumer durable buyers, but also disrupted distribution channels in the FMCG business.

Besides, higher upfront cost of vehicles due to an increase in road taxes in many States and a rise in insurance costs also took a toll on car and bike sales.

In this context, much was expected from the Budget to kick-start a recovery in consumption. But it turned out to be a bit of a damp squib. For urban consumers, there is no direct boost in the form of tax cuts or other tax exemptions.

While allocations to the PM-Kisan cash transfer scheme can help, gaps in identifying the beneficiaries continue to pose a problem.

Allocations to the MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) for 2020-21 have not changed much since FY19, doing little for non-farm incomes.

Both automobile and white goods makers had looked forward to the FM recommending cuts in the GST rates to the GST Council, to boost demand.

This did not happen. Customs duties on a host of household items, appliances, toys, stationery, furniture goods and auto components, though, were raised, which only indirectly helps domestic manufacturers.

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What’s in store?

Despite the absence of any immediate benefits from the Budget, it’s not all gloom and doom for consumer companies.

For one, companies have been working on their own strategies to ride the slowdown.

Bajaj Auto, for instance, has been focussing on international markets which bring in higher realisations. Exports constitute about 40 per cent of the company’s revenues.

FMCG players have been pushing staples rather than discretionary products. For example, price cuts, offers and introduction of regional variants in soaps have helped Godrej Consumer clock mid- to higher-than-mid single-digit volumes growth in this segment in the past three quarters.

In contrast, hair colours, which falls in a more discretionary segment, have witnessed demand cooling off.

Similarly, sales trends from companies such as Crompton Greaves Consumer indicate that smaller consumer electricals or appliances are navigating the slowdown better.

Corporate tax cuts have also given room for many companies to either cut prices or increase advertising spends to shore up volumes, or to show better earnings. This has also helped them absorb cost increases such as rise in input prices, at least to an extent.

Maruti Suzuki, for instance, saw its tax expenses come down by 78 per cent y-o-y in the three months ended September 2019 after it adopted the new rate of 25.7 per cent. Thanks to this, the fall in profits for the company was restricted to 39 per cent for that quarter. In the December 2019 quarter, too, the firm’s tax expenses fell by 22 per cent y-o-y.

The net sales for the Nifty Consumption Index companies that have so far released their December 2019 results show an aggregate growth of 4.9 per cent (y-o-y), an improvement over the 0.2 per cent (y-o-y) fall seen in the September 2019 quarter.

Profit growth (excluding telecom), too, has improved to 16.7 per cent from 8 per cent.

Going forward, the PFCE component of the GDP (in real terms) is expected to end the year with a 5.8 per cent rise, after rising only 4.1 per cent in the first half. This implies that consumption growth in the second half of this fiscal will be be better than that in the first half.

The Economic Survey 2019-20 also indicates that we may be at the trough of a business downcycle, wherein the GDP growth came in only at 4.5 per cent in the September quarter of 2019-20. A resurgence is expected beginning the second half of this fiscal.

Farm incomes are expected to recover, given the rise in crop prices, good monsoons, better storage level in reservoirs and an expected increase in rabi output. Minimum support prices for both kharif and rabi crops have been increased. All these will give rural demand a push.

The RBI’s recent move to make consumer loans cheaper by cutting the CRR (cash reserve ratio) requirements for the segment, is a shot in the arm for consumption. The latest data from the RBI show that for the first nine months of 2019-20, consumer durable loans dropped by 13.5 per cent y-o-y, while vehicle loans showed only mid-single-digit growth.

On the ground, too, it seems that the worst could be behind. For the auto sector, dealer inventory has come down to comfortable levels and retail sales are beginning to look up, although not stable yet.

As BS-IV stocks decrease during this quarter, high discounts which had dented realisations for companies until recently, is unlikely to continue. While off-takes may remain subdued over the next few months due to the impending BS-VI transition from April 1, a sharp dip in volumes is unlikely from here on, at least in car and bike sales.

CRISIL expects revenue growth for the FMCG sector at 10-11 per cent in 2020-21, as against the 8-9 per cent growth estimated for 2019-20. Nielsen does not expect growth in FMCG to deteriorate from now.