After demonetisation shocker, FMCG firms shrug off growth worries

March quarter will be better than previous one; full recovery will be visible next financial year

Market research agency Nielsen had an interesting point to present when announcing India’s consumer confidence index for the fourth quarter of calendar 2016 recently. It said that the Indian consumer remained confident despite dealing with a high-value note ban and that confidence could translate into higher sales for fast moving consumer goods (FMCGs).

While India’s consumer confidence index, which stood at 136 for the fourth quarter, was three points ahead of its score in the third quarter, the moot point is whether this momentum has indeed translated into sales for companies. How are companies expected to perform in the March quarter of 2016-17?

Indications are that the effects of the note ban, announced on November 8 by the government, are waning and that the March quarter of FY17 will be better than the December quarter for consumer goods companies.

On Tuesday, Tata Group company Titan, a jewellery and watch maker with FY16 net sales of Rs 11,277.9 crore, said the demand scenario in the March quarter had improved and sales across its divisions had been good.

“Cost control, along with strong growth in top line and gross margins, will enable the company to show very good growth in bottom line for the quarter and consequently for the year,” S Subramaniam, chief financial officer, Titan, said. “The second half of the year exceeded expectations on all counts despite a serious regulatory impact in the form of demonetisation,” he said.

Optimism in the air 

Titan is not the only one to be feeling this way. Bharat Puri, managing director, Pidilite Industries, who is also the chairman of the CII National Committee on FMCG, says, “There has been a gradual improvement in sales since the note ban, but it could take a quarter or two before the market fully recovers.”

Sunil Duggal, chief executive officer, Dabur India, says, “Improvement in consumer sentiment is certainly there, which shows up in month-on-month sales following demonetisation. The numbers are getting better. But reaching the (sales) level that existed pre-demonetisation will take a while.”

While urban FMCG trade, say industry experts, has switched to accepting digital payments, reducing its dependence on cash transactions, rural trade is yet to make the switch. Brokerage house Nomura says in a report dated March 20, “While the adverse growth effects of demonetisation are waning, urban consumption is recovering faster than rural consumption. Growth in transportation has also returned to positive.”

Prior to demonetisation, FMCG sales by value for the quarters ended March, June and September 2016 grew 6.2 per cent, six per cent and 8.3 per cent, respectively, according to data by Kantar Worldpanel, part of the WPP group. In the December 2016 quarter, sales growth declined 5.3 per cent, Kantar Worldpanel said, due to the ban on high-value notes.

A closer look at the December quarter puts things into perspective about how the market reacted to demonetisation: From 9.9 per cent in October 2016, FMCG sales value growth fell to 2.7 per cent in November, the month demonetisation was announced, recovering marginally to touch 3.5 per cent in December, according to data by Kantar Worldpanel. 

This, say experts, indicates that consumers were beginning to come around to the idea of demonetisation in December itself and were looking at ways and means to reclaim their lives. 

Other stakeholders, too, such as trade and transportation, subsequently fell in line. According to industry sources, in the three months ending March 2017, FMCG sales value growth has been in the region of 4-5 per cent, pointing to a recovery. The March quarter results of FMCG companies are likely to bear this trend out, experts say.

Confident consumers

This point is further reiterated by Credit Suisse Research Institute’s emerging consumer survey 2017, released last week, which shows that Indian consumers remain confident despite the challenges that demonetisation presented. The study also said that Indian consumers were confident of their current and future finances, contributing to buoyant sentiment, the highest in eight markets surveyed.

“India saw strong improvement in personal finance expectations; a net 47 per cent of the respondents surveyed expect the state of their personal finance to improve over the next six months, up from 27 per cent in last year’s survey. But, only 57 per cent of respondents thought it was a good time to make a major purchase, a sharp drop compared to 80 per cent last year,” the study said.

The report also speaks of a ‘conscious’ consumer, one who knows how much to spend and whose sense, say experts, was heightened following demonetisation, which saw 86 per cent of the currency stock sucked out of the system.

“There is certainly greater awareness among consumers about what they want to buy and in which order they want it,” says Abneesh Roy, senior vice-president at brokerage Edelweiss. “Which is why consumer staples will not be impacted to that extent, since these are essential items. A consumer can’t do without them, though when disruptions such as demonetisation happen, what will reduce is the quantum of purchase,” he says.

With remonetisation, however, the trend towards smaller purchase basket has reversed. Since March 13, limits on cash withdrawals from saving bank accounts have been removed, while limits on ATM withdrawals and current, cash credit and overdraft facilities were removed earlier.

Adi Godrej, chairman, Godrej Group, said he saw the FMCG market recovering sooner rather than later owing to the combined effort of the government and the Reserve Bank of India to get the economy back on track. “The remonetisation exercise was swift and with the implementation of GST what we will see is an improvement in GDP growth. That is good for everyone,” he said in an earlier conversation.

In fact, Titan’s just-released quarterly update hints, say experts, that consumer discretionary is also recovering from demonetisation, besides consumer staples. Note ban now appears to be a thing of the past.