Consumer segment recovery will be slow: SocGen

Ekta: We just heard the HUL management talk and they have delivered a volume growth of 6 percent this quarter as well. They did mention that rural in fact is doing better than urban and that is what lot of the managements have been telling us in terms of the consumption theory. What is your sense on it?

Mathur: These are in line with what we were expecting - rural growth rates are still going to be higher than urban growth rate. Now you have to remember one fact that these are low-ticket items, these are consumer product companies and under penetration is still very big for all of these branded consumer goods companies. So, yes, rural concerns are there but we are hopeful on the long-term prospects of the consumer sector in India. We are just coming out of a consumer slowdown, we have had a prolonged couple of three years of macro slowdown and the situation is just improving on the ground. We were in any case not expecting any V shaped recovery to happen, it is going to be slow and gradual process and we are happy that things are on track for that.

Anuj: So at current levels do you think there is still steam in HUL? We have seen the stock cross Rs 900 now.

Mathur: Yes we are buyers of Hindustan Unilever going into the results, we are maintaining buy as we speak now.

Ekta: And what did you make of the numbers?

Mathur: I would like to refrain from that.

Anuj: What is your outlook in general on consumer growth because we had Dabur a while back and they were a bit more nervous compared to HUL in terms of body language, how would you gauge the entire situation?

Mathur: When you are looking at various companies and across various categories one of the facts remain that the urban consumption revival is going to happen eventually. Now are we putting any quarter to it, answer is no. So we at Societe Generale believe that the macros are getting right in place, we are looking at some of the macro indicators like the consumer confidence survey which is conducted by RBI. We are also looking at the employability index, the number of new jobs created in urban India. This in turn will lead to slow and steady growth in the consumer goods market. Now another fact is that for a lot of branded consumer goods, urban market is a very important because as much as 70-80 percent sales are actually coming from these markets

Ekta: Some takeaways from the HUL management indicated that they are not seeing a definitive trend at this point in time in terms of what is happening with the rural space at least that is what I took away from it. What is your sense in terms of the risk of a possible under average monsoon could play in terms of consumption patterns for rural India possibly in the second half of this year?

Sahni: My belief is that looking at the rural market the way it has performed even in the years when the monsoon had not done so well the big impact comes on mostly farm equipments and tractors and stuff like that - motor cycles being part. On consumer products like what HUL, Dabur and Marico sell we have looked at it over the years that we don’t see major shake up happening there. So while there is some impact in terms of growth rate being slightly slower, overall nothing goes as negative as expected because this whole idea about rural market is not to do with whether people will start consuming more and more - it is more about whether people will start consuming.

That low level of penetration of so many of these categories that is the reason why the rural market continues to sustain a certain level of growth. However, if you ask me that is something which is good to have but something great to have will be the revival of the urban market. Because that is where value added products, that is where the high margin products, that is where the real story is.

The urban growth will actually tell you the story that economy is doing alright, that people are moving from rural markets to urban markets and they are moving to better products but the people who will move as of now they will be destitute because they do not have anything to do in rural areas and they will not find anything to do in the urban markets also because jobs are not being created.

When the urban market will start picking up, one the people who are already in urban centers they will move to better products and you will see more and more consumption coming from these migrant people as well. So that is something I believe that you should see in the next 3-4 quarters that is what should start happening. Till that time I would say rural despite the weak monsoon should be able to sustain it.

Ekta: If you had to compare for us, how much do you think or what is the rate that the urban market is growing at at this point in time and within the urban market what would be the difference say between tier-I, tier-II, tier-III at this point and compare that with us for the rural markets in terms of a comparative growth rate?

Sahni: In terms of absolute numbers because the data at this point of time, if we have to look at the most recent data we only get the data at the macro level which is GDP growth which has happened and which is expected to happen but if I have to index it for you and make it simpler - if let’s say in general India is growing at let’s say at a unit of 100, so urban markets as of now in that ratio are growing at somewhere around 40-45 and 55-60 is what we are seeing coming from the rural markets in terms of the growth rates when we talk about.

In the tier-I, tier II and tier III towns, clearly the tier-III towns which are closer to let’s say the semi-urban, they are showing better growth than compared to the big cities like metros and mini-metros whether Delhi, Bangalore or even Mysore for that matter, these are the markets which are growing at a much slower rate and its story is the same because wherever it is that people will start consuming new categories we will continue to see growth in consumption. Wherever we want people to start buying better brands and start buying higher priced product, we are seeing a challenge there across categories whether it is you are buying a TV or whether you are buying a refrigerator or whether you are buying a bar of soap or whether you are buying a packet of chips. That is all across the categories that’s what we are seeing.