Budget 2023: As discretionary demand dwindles, industry wish list runs long

FY22 was a stellar year for companies in the discretionary spending sector. Pent-up demand after the pandemic-induced lockdowns boosted the top line of most companies – paints, quick service restaurants (QSRs), consumer electronics, and apparels.

The 290 companies that make up the BSE Consumer Discretionary Index posted an over 19 percent year-on-year growth in sales and 170 percent YoY increase in net profit.

However, FY23 has turned out to be sombre so far. For the half-year ended September 2022, the net profit of the pack fell 25 percent compared to the six-month ended March 2022, while sales grew 3 percent. The index has fallen almost 40 percent last year compared with a 21 percent gain in the year before.

Operating margins of companies catering to discretionary spending have contracted over 100 basis points on the back of rising raw material prices. And the prospects for FY24 don’t look too bright either.

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“We suspect the slowdown in discretionary consumption is due to a combination of factors: possible slowdown in new hiring in the organised sector, withering of pent-up demand, especially after the festive season, elevated inflation sapping household savings, and increase in mortgages due to a sharp jump in interest rates,” Kotak Institutional Equities said.

This became evident in the Q3 numbers. Asian Paints and Pidilite both posted volume growth that was little changed against expectations of 4-5 percent growth. Both flagged demand strain in the rural and semi-urban areas.

Electrical consumer goods company Havells reported a 7.2 percent fall in quarterly profit, citing “moderating” consumer demand.

Also Read: Havells shocks investors with Q3 numbers, brokerages lower target price

“For quick service restaurants, we were expecting same-store sales growth of 8-10 percent in FY23, but it looks like we will end the fiscal with only 5-6 percent growth,” said Karan Taurani, senior VP - research analyst at Elara Capital.

Titan’s jewellery business growth moderated to a single digit after doubling in Q2 of FY22. But negating the high base effect, the three-year compounded annual growth rate (CAGR) in volumes is 12 percent.

D-Mart operator Avenue Supermarts reported 3-4 percent per-store revenue growth as general merchandise and apparel segments did not do “as well as expected.”

Outlook for FY24
The modest sales growth reported by discretionary companies came largely on the back of prices that were increased to offset high raw material costs and the trend of premiumisation in metro cities. For top line and bottom line to grow sustainably, sales have to be driven by higher demand and volumes, but that is a long road ahead, analysts said.

While the Street expects 15-18 percent EPS (earnings per share) growth for consumer discretionary companies, foreign brokerages CLSA and Jefferies have said they see downside risks to this number. In the consumer space, they prefer staples over discretionary.

Also Read: Consumer staples to outperform discretionary stocks in H2FY23, says CLSA

“There are concerns about further slowdown in discretionary and retail, especially after nearly two years of strong recovery and aggressive network expansion. FY24 will also see EPS growth converging for staples and discretionary stocks, with downside risk to estimates in discretionary,” according to Jefferies.

Discretionary stocks continue to trade at a premium to staples and their own history and are prone to further de-rating in 2023 if growth moderates, it added.

Challenges, budget
The downside risks are mainly low levels of disposable income and low penetration of discretionary goods in India.

“A slowdown in startup funding has driven job cuts in several cases, even as an increase in interest rates would lead to higher EMI outgo for households,” according to Jefferies. In addition, there are sector-specific challenges such as rising competition in the paints and consumer electronics segments.

The electronics industry also has to deal with high import duties on motors and components. Since January 1, ceiling fans have become 8-20 percent costlier because of new norms set by the Bureau of Energy Efficiency. This will further affect consumer affordability.

Also Read: Ceiling fans get costlier as BEE's revised norms mandate star labelling

The PHD Chamber of Commerce and Industry has pushed for an increase in consumption-led demand in Budget 2023 through a hike in per capita disposable income. This can be achieved by enhancing consumption expenditure rebate to Rs 5 lakh per annum, the Chamber said.

Some industry leaders are batting for the basic income tax exemption limit to be increased to Rs 5 lakh from Rs 2.5 lakh and enhancement of standard deduction of Rs 50,000 to about Rs 80,000.

The government is likely to continue with its thrust on initiatives such as Make in India and production-linked incentive schemes to boost local manufacturing and employment generation.

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Companies are asking the government for a five-year extension in the  Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors with an increased outlay of Rs 10,000 crore in the Union Budget for FY24.

Rationalisation of goods and services tax rates is also on the wish list.

“We expect the government to look at categories like fans, which is a product of basic need and still being taxed at 18 percent. Mandatory star labelling norms have further led to price increases. We feel that the GST rate across energy efficient products should be reduced to help people switch to these products,” Rakesh Khanna, managing director of Orient Electric, told Moneycontrol.

Relief in import duties and input tax credits can help boost the health of the discretionary sector, said experts.

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