Dear Reader,
Will this be the year that consumer stocks come back in the reckoning? It’s a question that applies particularly to FMCG companies. Despite being a populous country, with a large and high growth economy, India’s consumption engine did not do as well its investment engine did in FY24. This was particularly true for staples. Investors saw the writing on the wall and consumption indices did not do as well as the broad market did.
Why may FY25 be different? One recent data point is improving consumer confidence. The RBI’s Consumer Confidence survey has shown a jump in March 2024 after showing rather downbeat results in recent years. Manas Chakravarty points out that the 2019 elections too saw March’s survey results point to a boost in consumer confidence. Is there something about elections that puts consumers in good humour? If the trend continues in the rest of the fiscal, then that should be welcome news for consumer companies. It is not leading to spending growth as such, shows the survey. But to know the nuances and the big picture, don’t miss reading it.
That spending trends have not changed much, as far as FMCG is concerned, is evident from the preliminary results put out by FMCG companies for the March quarter. They have used words such as sluggish and subdued to describe the market conditions in the sectors they operate in, which cover the entire range from home and personal care to foods. But, that is not reason enough to give their results a miss.
They talk about price cuts leading to higher demand in pockets. They mention that gross margins are still fat (the difference between sales and total raw material cost) but are being rendered down by spending more on advertising & promotion and on distribution. In distribution, companies expand their direct reach –as opposed to, say, servicing a market through wholesalers—to newer markets, which eventually leads to better results but requires initial investments. This has served companies such as Nestle India very well in recent years.
Thus, the focus is shifting to a proactive approach to grow sales led by volumes rather than what seems a lazy approach of letting profits grow on the back of fatter margins due to falling input costs. The second one is what has led to nimble competitors offer products with a superior value equation to inflation-stung consumers.
A volume-led approach to sales growth should be the primary one in a developing country such as India, especially in the mass market categories. If people can switch from loose, unbranded or smaller brands to national brands, they have shown they can as easily switch back when circumstances change. Companies need to fight to retain their customers, a trait that was not on display in FY24.
Do the trading updates change the investment outlook for the three companies who have reported them? Read here to get the full picture on Marico and Godrej Consumer Products. And for a look at what these updates say about companies investing to regain growth, see here.
Of course, the results of the sector biggies such as Hindustan Unilever, ITC and Nestle India are yet to come and they will give us a more complete picture of sector performance. Then there is the accompanying management commentary that should yield clues on critical areas such as premiumisation and whether it remains as strong a swing factor in earnings growth as it used to be. But the main factor investors should be watching out for is whether companies are planning to cook up a storm on the volume growth front.
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