It's 2005 once more for consumer goods majors

Net sales growth hit a 10-year low of 9% in FY15

The decade-long bull-run for consumer goods majors like Hindustan Unilever, ITC, Asian Paints, Nestle, Dabur and Bata seems to be coming to an end. Sales growth of soaps, shampoos, deodorants, detergents, noodles, biscuits and juices hit a 10-year low of nine per cent in 2014-15. The industry had last reported a single-digit growth rate in 2004-05, the first year of the United Progressive Alliance government.

In the past 10 years, the industry's revenues grew at an annualised rate of 15 per cent, leading to a jump of more than four times in combined net sales during the period from 2004-05 to 2014-15. In contrast, the industry expanded at a compound annual growth rate (CAGR) of 6.1 per cent during the period from 2000 to 2005, with growth bottoming out in 2002-03, when revenue grew 1.7 per cent.

The analysis is based on the annual results of the country's top 13 consumer companies - across personal care, packaged foods, tobacco, footwear and paint segments - whose numbers are available for 15 years.

The near-term outlook doesn't look bright, either, with companies reporting sluggish demand for small-ticket consumer goods in the first two months of the current financial year. "The demand environment remains challenging and I don't foresee any immediate uptick," says S Raghunandan, chief executive, Jyothy Laboratories.

Slow volume growth robbed companies of the gains from low commodity prices and moderation in international crude oil prices. The industry's operating profit was up 12.6 per cent in 2014-15, growing at the slowest pace in six years, while net profit grew at 8.9 per cent, a 10-year low.

ITC echoed the view. The country's most valuable fast-moving consumer goods (FMCG) firm reported flat revenue growth in the March quarter. It blamed "steep increase in taxes/duties on cigarettes, sluggish demand conditions and intense competitive activity, with industry players stepping up consumer and trade offers with a view to garnering volumes, offsetting the benefit accruing from benign inflation in input costs."

Earlier this month, Hindustan Unilever had also reported a demand slowdown. "Demand growth, at 14-15 per cent until two years ago, stood at four-five per cent in the year gone by. Of this, urban demand grew at about four per cent and rural at about eight-nine per cent," said Sanjiv Mehta, CEO and managing director, Hindustan Unilever, during the company's earnings call for the March quarter.

Analysts agree and see sluggish growth in consumer demand in the near to medium term. "In the past, consumer demand was supported by higher government spending on schemes such as those for rural employment guarantee, and other social welfare programmes. This has slowed and the impact will last for a while, unless it is compensated by faster income growth in urban India," says Dhananjay Sinha, head of institutional equity at Emkay Global Financial Services.

Sinha also takes a negative view of the recent increase in excise duty on cars, increase in service tax and Customs and excise duty on fuel. "Indirect taxes are passed on to consumers, reducing their purchasing power. The hit is felt the most by the low-income group," he adds.

According to various estimates, rural areas now account for half the industry's demand in volume terms, up a third from a decade ago. This has made rural India key to the fortunes of consumer companies.

Historically there has been a close correlation between the government's final consumption expenditure (revenue expenditure) and private final consumption expenditure. For example, in the period after 2008, the consumer boom was preceded by a sharp rise in government expenditure, and vice versa after 2012.

A slowdown in consumer demand began in the last two years of UPA's second term in office, as the government came under pressure to bring down fiscal deficit and put the brakes on government spending. This has been exacerbated by the recent moves by the government to shift fiscal priorities from welfare spending to asset creation. Economists, however, doubt if capital expenditure alone can revive growth. "I cannot foresee a capex-driven growth in the absence of a robust consumer demand. Why should businesses and companies invest in new projects if consumers are scaling back spending," asks Dharmakirti Joshi, chief economist, CRISIL.

"The demand also took a hit from unseasonal rains in past few months. This was a double blow, coming as it was after a poor monsoon last year," says G Chokkalingam, founder and CEO, Equinomics Research and Advisory.

Chokkalingam is now pinning hopes on a normal monsoon this year, and capex-driven job and income growth in urban India to revive the consumer boom. "Consumer growth should revive later this year, as companies and the government revive capital spending. This would also push the economic growth rate by the second half of 2015-16," he adds.