The 'K' that scares the Great Indian Consumption Story along the course of recovery

“People are buying luxury cars but not chappals and underwear.” The joke was everywhere on Twitter recently. But, jokes apart, it shows the grim reality of India’s "K-shaped" recovery.

A K-shaped recovery occurs when different parts of the economy recover at different rates, times, or magnitudes. Though SBI’s economists dismissed the 'K-shaped recovery' critique in a report in January, the Q3 earnings trend flies in the face of that view.

Here’s how India’s consumption story is panning out:

FMCG staples

This segment is a true indicator of a country’s economic health. In India, revenue for the FMCG pack has been on an upward trajectory due to the price hikes to mitigate raw material inflation. But this has come at the cost of volumes.

Rural India constitutes about 36 percent of the sales pie for a typical consumer company and this segment has been reeling under inflationary pressure. So much so, that Nestle India reported a loss in volumes for its Maggi Chotu pack, which costs Rs 7. Except for biscuits, demand in all other FMCG segments has taken a hit.

Also Read: Price hikes hit 'chotu' packs & demand in tier 2-6 towns, rural India resilient: Nestle

While Hindustan Unilever’s Sanjiv Mehta said that he has been seeing “green shoots” in rural demand, there is still a long way to go. According to the report released by data analytics firm NielsenIQ, in October-December, the industry grew 7.6 percent in terms of value but urban volumes grew 1.6 percent year-on-year while rural volumes declined 2.8 percent. Some consumers have down traded to lower unit packs and others to unbranded regional alternatives, analysts noted.

Encouraging winter crop sowing and indications of higher farm income came as good news for the industry but now fears of a subdued monsoon due to El Nino pose a new challenge for the industry.

Consumer discretionary and QSR

“The slowdown in discretionary spends is visible” Not our words. That’s what Uday Kotak said. Be it Asian Paints, Havells or Domino’s operator Jubilant FoodWorks, most discretionary companies have taken a hit on their bottomline as inflation has burned a hole in the low-to-mid income Indian’s pocket.

In Q3, Asian Paints and Pidilite both posted volume growth that was little changed against expectations of 4-5 percent growth. Both flagged demand stress 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. Whirlpool India also flagged similar concerns in its earnings statement.

Also Read: Kotak cuts target price for QSR stocks as consumption slows down

Same-store sales growth for quick-service restaurants came in below Street expectations. Analysts believe startup layoffs and the slowdown in IT hiring are impacting spending and sentiment, with the fast-food category also witnessing down trading now. Though the festive season was a good time for the entire discretionary space, the slowdown that has crept in since shows no signs of a turnaround.

Retail

Nykaa’s top boss Falguni Nayar said lower consumer spending impacted the beauty-tech platform’s margin and revenue. It reported a 94 basis points margin contraction in Q3.

Page Industries, which is the exclusive licensee of Jockey, also cautioned that demand is not as buoyant in the ongoing quarter. “We are not seeing any recovery in the market,” managing director VS Ganesh said in a recent earnings call.

Avenue Supermarts’ earnings also disappointed as the higher-margin general merchandise and apparel segments underperformed the FMCG and staples segments. “Discretionary non-FMCG sales did not do as well as expected in this quarter,” said Neville Noronha, CEO & managing director, Avenue Supermarts Limited.

Footwear retailer Relaxo’s Q3 was no different from the industry. Revenue from operations fell 8 percent on-year weighed down by subdued demand in mass segment articles. It also lost market share to unorganised players. On the flip side, luxury shoemakers such as Metro Brands have emerged stronger.

That brings us to the other end of the spectrum.

Hotels and tourism

The hotels and tourism sector is the brightest beacon in the gloomy consumption story. Ever since the pandemic ebbed, the sector has been a major beneficiary of the recovery. In November 2022, the Indian hotel industry recorded its best performance since the pandemic began, with occupancy at 68-70 percent and average rates exceeding Rs 7,000.

The third quarter, which is a seasonally strong quarter thanks to a number of festivals, was strong for hotel companies as they saw sharp jumps in revenue and margins. The management of hotel companies is bullish on the near future as well.

Also Read: Bulls check into Indian Hotels after highest ever quarterly profit

“The outlook is very strong, albeit it is all built mostly on domestic (tourism) because foreign inbound is still lagging behind 2019-20 numbers,” said Puneet Chhatwal, Managing Director & CEO, Indian Hotels, in the chain’s recent analyst call.

He added that there are a lot of events happening this year, “including G20 and the Cricket World Cup, which should further boost demand or provide the necessary buffer should there be any form of headwinds coming from anywhere”.

Analysts concur. In a note, HDFC Securities said that with demand outpacing supply, which the latter is unlikely to catch up with over the next 2-3 years, it expects both average room rates (ARRs) and occupancy to remain strong, leading to higher RevPar for the industry.

Automobiles

Another silver lining in the consumption bucket has been automobiles, especially electric vehicles and sports utility vehicles (SUV). The sector has seen strong growth led by a number of model launches in the mid- to high-end segments.

For some models, such as the Mahindra Scorpio N, Tata Nexon, Maruti Suzuki Brezza and Hyundai Creta, the order backlog is as high as 12 months. The demand is such that the 5-door Jimmy, which Maruti Suzuki launched in January, has already garnered about 17,000 orders, and the count is increasing.

Listen to: Market Minutes | 4 trends set to disrupt the auto sector in coming years

Shares of auto companies have also performed well. BSE Auto, a benchmark index of auto and auto ancillary companies, has returned 17 percent in the last year. Mahindra & Mahindra and TVS Motor are two of the best performing stocks from the sector, with one-year returns in the 50-70 percent range.

(Graphics: Upnesh Raval, Rajesh Chawla)

One worry has been the poor sales of two-wheelers, which are largely bought by low- and mid-income riders. Motorcycle sales have stagnated, putting pressure on shares of Hero Moto and Bajaj Auto. Eicher Motors has been spared from the selloff as it sells motorcycles in the mid-range, demand for which remains strong.

Sin goods

The so-called sin goods — alcoholic beverages and cigarettes — have also seen strong growth despite challenges. The reason is that they are adapting to inflation, which is hitting the lower economic strata of society.

Some distilleries are banking on premiumisation of their products, targeting mid and high-income consumers, and this portfolio has seen double-digit growth. Cigarette makers, meanwhile, have introduced new sizes that are priced lower and are banking on formalisation of the market.

Hina Nagarajan, MD & CEO of United Spirits, which sells Johnnie Walker branded liquor, said the company continues to witness good growth post-COVID, particularly in the mid-upper segments of the Prestige & Above (P&A) portfolio. That is reflective of the consumption revival in the broader economic context, with the festive season adding further momentum, as mentioned earlier.

Also Read: ITC nears Rs 400 mark; why costlier cigarettes are great news for shareholders

“Our premium Indian whiskeys and scotches continue to drive category expansion on the back of the sustained trend of premiumisation. Inflation and the larger global macroeconomic headwinds may act as a bit of a drag, but we believe that consumer demand will continue to be robust,” said Nagarajan.

Cigarette volumes have also been strong, with double-digit growth recorded across makers. ITC, the biggest cigarette seller, recorded 17 percent growth in revenue from this portfolio.

“Several differentiated variants continue to be launched to further strengthen the range of offerings and ensure future-readiness of the product portfolio,” ITC said in a statement.

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