FMCG remains a safe haven despite slower growth: PLilladher

Prabhudas Lilladher has come out with its report on consumer sector. According to the research firm, QSRs likely to remain under pressure in the near term; Service tax to impact sales in times of tighter consumer wallet.

CNX FMCG Index outperformed NIFTY by 22 percent in the past 12 months and 5 percent in one month, as flight to safety continues amidst negative news flows from interest rate sensitive's

Durable demand slows down: Discretionary segments showing lower demand; Cars sales have declined by 6.7 percent in FY13 (6 percent growth in FY12); two wheeler sales up by 3 percent in FY13 (12 percent in FY12); durables sales growth has also slowed down

Staples demand: volume growth has slowed down, more so in discretionary segments like processed foods and premium personal care

Jewellery and accessories: lower growth led by pressure on consumer wallet, decline in Gold prices like to boost the jewellery demand

Rural Demand: Medium-term outlook in rural demand remains strong led by higher agri prices and 46 percent increase in allocation for rural spending (Rs800b) in run upto elections

Input Costs: Input costs favourable for PFAD, Tio2 and copra; sugar and wheat prices are off their highs.

Competition: Competitive activity is rising as HUL and Reckitt have been engaged in ad wars. Segments like detergents, soaps, oral care and skin care are witnessing higher advertising and sales promotion

Food Services: QSRs likely to remain under pressure in the near term; Service tax to impact sales in times of tighter consumer wallet

Positively inclined towards companies with strong pricing power or with benign input costs

Large Cap Picks: ITC, HUL
Mid Cap Picks: Titan Inds, Britannia and Pidilite

Rural demand has been growing ahead of urban demand from past 2/3 years. We expect the trend to sustain as:

Double-digit increase in MSP: Most of the agri crops have seen more than 15 percent CAGR in crop prices since 2011 which has given a boost to the rural purchasing power.

Wealth effect: Land and Gold account for a big chunk of rural savings. Land prices in rural areas in general and close to urban clusters in particular have zoomed in the past few years. Gold prices have increased by 60 percent in the past two years and 120 percent since Jan 2009. This has added to the wealth effect and purchasing power in rural India.

Rural allocations up 46 percent; Despite fiscal considerations, GOI has proposed an increase of 46 percent in rural development expenditure to Rs800bn, led by sharp increase in allocations for Rural housing and Roads & Bridges.

National Livestock Mission: GOI has proposed National Livestock Mission (Rs3.1bn allocation) which will boost rural incomes from ancillary activities. We note that similar initiatives on fruits (National Horticulture Mission) has given 20 percent CAGR in production in the past few years.

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