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Consumption-driven stocks are in focus as rural demands are set to rise on good rain. Also, harvesting commences from mid-October coinciding with festival demand during Dussehra and Diwali. The 7th pay commission payout of arrears and higher salary are also likely to support the consumer goods demand.
Higher consumption is in turn likely to have a ripple effect on the economic growth and investment cycle in the medium term.
The only near-term headwind remains a potential postponement of discretionary consumption in expectation of a GST-driven price cut in consumer durable such as passenger vehicles and household goods, said analysts.
Consumption stocks –paints, auto, cement, textile, consumer durables and FMCG — are all expected to get a boost from improved demand on good monsoon rains with higher rural demand expectations.
“We expect rural demand to start picking October onwards as the fresh harvest starts coming in. This will also coincide with the end of the pitru paksh on October 1 (or shradh as is commonly known),” said Indranil Sen Gupta and Abhishek Gupta, India economists, Bank of America Merrill Lynch.
“This period is considered as inauspicious for starting anything new and the end usually signals a pick-up in consumer demand. At the same time, October also marks the beginning of the Hindu festival season with Dussehra and Diwali on,” they added.
The southwest monsoon is running a seasonal cumulative deficit of 5 per cent till last week against the Indian Meteorological Department’s forecast of 6 per cent of surplus for the monsoon season ending September. But the rainfall distribution has been good this year with most areas receiving normal rainfall.
“Despite the small rainfall deficit, current reservoir storage level at 68 per cent of capacity is running 17 per cent higher than last year, although 8 per cent lower than average of 10 years,” analysts from Bank of America Merrill Lynch said.
There could be some postponement, especially as prices of consumer durables, such as cars, are slated to slip 2-5 per cent as analysts expect companies to pass on up to 50 per cent of the benefits from the reduction in tax rates after GST is adopted. This may will lead to a bunching up of discretionary spend in the June quarter, if the GST is implemented from April 1, 2017.
After seasonally weak first quarter analysts expect modest earning growth in the second quarter, however second half of FY17 is expected to be better with consumer demand pick up being key factor to growth.
Ravi Sundar Muthukrishnan, Vinod Karki and Pankaj Chhaochharia, research analysts at ICICI Securities, in a strategy report on Q1FY17 results said, “Q2FY17 consumption indicators (YoY growth) – (a) domestic sales of two-wheelers (19.9 per cent) and four-wheelers (16.7 per cent); (b) petrol consumption (20 per cent); (c) retail credit (18.8 per cent); (d) IIP – consumer durables (5.9 per cent) – suggest that discretionary consumption will sustain.”
Even airlines are expected to share the festive cheer. “Seasonality led pickup in yields particularly in Q3 will be preceded by a seasonally weak Q2. The volume numbers even in a traditionally weak Q2 has surpassed expectations,” ICICI Securities said.
Mrinalini Chetty and Siddhartha Khemka analyst, Centrum Wealth Research, in Q1 FY17 result update on Siyaram Silk Mills said, Owing to the seasonally weak Q1 and overall subdued consumer demand, the company’s revenue witnessed a decline. With the upcoming festive season in H2, we believe there could be a pickup in demand which would be beneficial for the company owing to the increasing disposable income and shift towards branded products.”
Most paints companies have been reporting healthy growth in recent quarters and they are likely to benefit increase in consumption demand led by good monsoon, implementation of 7th Pay Commission and OROP(one rank one pension), improvement in new construction and housing related activity, governments initiative of providing housing for All and lower raw material cost with softness in prices of crude and crude derivatives.
FMCG companies like Nestle, Titan are going to benefit from acceleration in nominal GDP growth, 7th Pay commission roll outs which will boost urban demand and normal monsoon which will help improve rural demand.
However, brokers say if one is buying companies in the consumption space with high valuations then one should be prepared for the risks too. Right now many of these consumer-faced companies have high valuations.
K R Choksey, managing director, K R Choksey Shares & Securities said, “If you are buying at higher valuations, then be prepared for disruptions, as long as going is good they can be rewarding, classic example is Jubilant Foodworks.”
Global rating agencies see India growing at around 8 per cent due to higher consumption led growth in the economy.
Paul Gruenwald, S&P Global Ratings’ chief economist for Asia-Pacific said, “For India, we are still forecasting GDP growth at about 8.0 per cent over the next few years. Moreover, this is relatively high quality, “steroid-free” growth backed by a broadening consumption base.”
“India’s structural reform agenda has maintained strong momentum, most recently with the GST passage, and should propel growth higher. Inflation remains a risk, given the large weights on food, fuel, and other volatile items in the Reserve Bank of India’s target basket,” Gruenwald said.
The long term consumption outlook also looks robust with a FICCI-PricewaterhouseCoopers report estimating double digit growth for consumer business over the next decade with India’s growing consumption capacity, demographic shape and lifestyle changes.
Higher consumption demand is in turn likely to have a ripple effect on economic growth and investment cycle in the medium term.
Arun Singh, lead economist, Dun & Bradstreet India said, “Expected improvement in rural income and consumption given normal monsoon and likely demand for the consumer goods given 7th pay commission award which was doled out just before the festive season, is likely to provide support to growth and investment cycle in the medium-term.”