Is the great Indian consumption theme tiring?
Results from FMCG majors such as HUL, ITC, and Colgate reveal that the Indian consumer is willing to look for a different brand if it translates to savings under this uncomfortable high inflation.
November 07, 2013 / 10:22 IST
As I write this, ITC and Colgate are down three percent and HUL is trading flat. All these companies came out with their numbers on Friday and Saturday. Is there a common theme?
There clearly is one remarkable similarity; competition. Indian consumer has clearly stated that he is willing to look for a different brand if that translates into any savings under this uncomfortably high inflation. It has impacted all companies but in different ways. Also read: Massive non-farm income to push rural India in H2: Axis CapColgate reported a healthy 10 percent volume growth. It really is the "power of the brand" as CLSA points out in its report. However, despite this and sales growing 16 percent, net profit actually fell 25 percent. The advertising spends went up at a rate twice of sales growth. One has to resort to higher advertising when you have an extremely strong brand in P&G's 'Oral B' with Madhuri Dixit as the brand ambassador. This translated to worst earnings performance in the last 11 quarters. The company also saw steep increase in other spends due to new launches. It is just the beginning. Oral B has not even made a national launch and they won’t relent anytime soon. P&G is a global heavyweight that can match Unilever for every penny.Meanwhile, ITC disappointed the market after a long time and reported a cigarette volume degrowth of 3.5 percent. Some people want to make us believe that this is due to India awakening to the dangers of tobacco and hence cut down in consumption. I would be happy if that is the case, but I would love to see the volume growth data in some of the lower level cigarette brands to see if some part of the population has shifted to lower prices cigarette since ITC hiked prices significantly this quarter and in turn whether the company has finally seen some demand elasticity. But, what is even more worrying for ITC is the volume growth in ex-cigarette FMCG business which saw a 16-quarter low revenue growth of 16 percent on a relatively low base.Hindustan Unilever, on the other hand, had a decent volume growth around 5 percent. However, analysts will be concerned about the deceleration in sales growth of soaps & detergents, where the company could only post 6 percent revenue growth despite double digit volume growth. The company passed on lower raw material costs to consumers and even cut prices more than the cut in raw material costs. It is this space where channel checks clearly reveal that consumers are willing to make a shift from their favoured brands if it leads to savings. For example, we have seen some relatively new brand offering 1+1 on their washing powder in retail outlets which have seen quite a good response from consumers.To sum it all, the competitive intensity, high inflation and the imminent slowdown in discretionary consumption clearly means that the next 2-3 quarters would be tough for FMCG companies. They may have to continue to innovate to beat the slowdown blues. All these stocks trade at 30-35x 1 year forward earnings and in this environment, any major outperformance from any of these 3 stocks looks tough. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
