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4 factors that affect India’s consumer sector
The consumer goods sector is the fourth largest sector of the Indian economy. After facing setbacks thanks to demonetisation and GST implementation, it is now bouncing back. This can be seen in the sector’s outperformance in the stock markets between May 2017 and 2018.But remember,past performance need not be indicative of future performance. The consumer sector’s future performance is dependent on a multitude of other factors.
As the companies gear up to announce their results, here is how you can track the sector:
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Pricing and promotion activity:
Why this matters: Prices of companies’ products are useful to monitor. They help understand how companies price their goods. Plus, it also helps understand their ‘pricing power’ – the ability to pass on any increase in input prices to consumers. It can also serve as an indicator of competitive activity.
Current trend: In the April 2018, companies largely adhered to the existing pricing strategies with only a few exceptions. No major marketing campaigns were rolled out in soaps, detergents, hair oils, shampoos, food and beverages. Detergents were an exception with mixed trends—while Hindustan Unilever (HUVR) increased pricing of certain variants, P&G increased the promotional activity. HUVR is aggressively marketing its newly launched shampoo.
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Input Costs:
Why this matters: If input prices continue to rise, consumer companies have to either absorb them or pass them on to the consumer. In a highly competitive market, companies absorb and profits take a hit.
Current Trend: Prices of agri-inputs like oil and other commodities show a mixed trend. Tea, coffee, sugar, copra, safflower oil, styrene and acrylic acid saw a downturn in their prices whereas the prices of cocoa, palm oil , sunflower oil, rice bran oil increased. The steep surge in cocoa can impact chocolate making companies like Nestle. Moreover, all FMCG companies can get impacted due to the rising crude oil prices, according to a Kotak Institutional Equities report dated 30 April, 2018.
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Making sense of news:
Why bother about the news: There are promotional activities and transformational developments reported in news. As an investor, it is important to know that your company is working and talking about it. In the consumer space, the common mantra is ‘Jo dikhta hai, who bikta hai’. Visibility is everything in marketing .
Current Trend: This summer season is witnessing many new drink launches and marketing campaigns by Coca-Cola, Amul and Bisleri. A new facility was announced by Varun Beverages for non-seasonal drinks. Varun Beverages is a bottler for Pepsico, the US-based cola giant. Companies are eyeing expansion via acquisitions different areas and segments. Parag Milk Foods acquired a Danone facility in North India, while the Future Group is evaluating acquisitions to enter the lucrative Ayurvedic personal care space. Dabur India completed two international acquisitions. The only deterrent is the fall in wheat production, which may put pressure on the prices of wheat-based products. Overall the sector is likely to thrive in the wake of these growth strategies, the Kotak report suggests.
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Overall Economy:
Why bother about the news: The current economic trend determines future sales. If consumers have more money in hand, they will buy more and vice versa.
Current Trend: The government’s focus is on boosting rural growth. This could lead to improved rural income. Any rise in income levels is good news as it could mean more spending, thus improving the growth of the consumer sector. However, India is facing a cash crunch. This shortage of liquidity can impact consumption in the near term, which in turn could slow down the sector’s performance.
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27%
In the 12 months to April 2018, shares in the consumer sector have outperformed the broader market posting a 27% return. Broader indices rose 15% during the same period. This could be due to an anticipation of better rural consumption going forward.
