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4 Takeaways from the consumer companies’ results
The Indian economy is huge. It is impossible to survey each and every aspect of the economy to understand its progress. This is why we have indicators and bellwethers. Hindustan Unilever and other consumer goods companies help indicate the state of consumer demand in the country. This is very important, because most of the Indian companies depend either directly or indirectly on the domestic market to earn money. So, if demand slows down-people buy lesser goods and services, then companies would not grow.
Results for the quarter ending March 2015 are out. Most consumer goods companies have posted double digit growth in profits. Yet, the devil lies in the fine print.
Here are four key takeaways from the results:
Sales grew faster than expected in terms of sheer volumes. Hindustan Unilever, one of the largest consumer goods company in India, saw sales volumes expand 6% in the quarter from the previous year. This led to 9% jump in revenues to Rs 7,555 crore for the company. For the entire fiscal year 2014-15, volumes grew 5%. This shows consumers are spending more and more in the country-a good news for the investors. However, this is much slower than the 14-15% growth seen two years ago, according to a Kotak Securities report. This shows that overall demand environment still remains challenging.
Rural markets lead:
Demand for products is much stronger in the rural areas as compared to urban cities. Across the board, companies saw faster growth in rural markets, even in comparison with the entire Indian market as a whole. Hindustan Unilever's rural segment grew 8-9% in FY15, double the urban growth of 4%. Similarly, Godrej Consumer Products, another key player in the consumer goods industry, witnessed 17% growth in its rural business as against 9% growth in its urban segment. Even Marico saw its rural business grow 26%, higher than the 18% growth in its urban business.
Rural markets are driving consumer goods companies' profits. So, anything that affects the rural markets will be a bigger risk. The single biggest factor here is the seasonal rainfall from the South-West Monsoon Winds. A lot rides on monsoon when it comes to consumer companies, or even the Indian economy. Some reports suggest that rainfall could be lower than average this year. If monsoon indeed is sub-normal, incomes will fall for rural customers because of poor agricultural productivity. This in turn could hit consumer demand. However, rural demand is resilient. This can be seen in the fact that despite a number of negative factors such as unseasonal rains and hailstorm or the lack of growth in real wages (after adjusting for inflation), rural demand grew strongly. So, the effects of a sub-normal monsoon could turn out to be lower.
Fall in inflation:
The rise in prices over time has been one of the biggest problems in India. However, in the past few months, inflation fell to comfortable levels. The price of raw materials and commodities like oil trended lower. The benefits of slow inflation can be seen in the earnings results too. When inflation falls, the cost of production reduces for companies. So, they produce goods at cheaper rates. This allows them to pocket more money as profit. As a result, consumer goods companies announced double-digit growth in profits even though revenues grew in single digits. For example, HUL reported 17% jump in profits, much higher than the 9% jump in revenues for the March quarter. Dabur, another consumer goods company, saw its profits jump a whopping 21% even though its revenues grew only 10.2%. Similarly, net profits for Godrej Consumer Products too rose 12.4% in the quarter while its net sales grew 8.24%.
Rural India is a key market for consumer goods companies, especially Hindustan Unilever. This is not just because they are seeing higher growth. The market accounts for one-third of the overall consumer goods market, according to the Kotak Securities report. For HUL, however, this figure is higher. The rural market accounts for 40-45% of its total revenues.