After affecting industrial growth and capital expenditure plans of India Inc, slowdown pangs are now reflecting in the performance of some of the leading consumer companies that are largely dependent on discretionary spends.
Though fast-moving consumer goods (FMCG) companies did not show any signs of slowdown in the June quarter and most reported robust volume growth, managements have guided for a cautious outlook for the coming quarters.
These companies have already started reporting disappointing performance, and the outlook is unlikely to improve in the medium term. Hence, stock valuations at an average of 32 times FY13 estimated earnings are becoming difficult to justify.
Among the top 11 companies in terms of market capitalisation, only a few have done well. Going by analysts, only TTK Prestige looks relatively better-placed as its products are a necessity in daily life and have low penetration. However, here too, most positives are priced into the stock’s high valuation. From a pure valuation perspective, though, Arvind (an emerging retail play) and Pantaloon Retail India (largest retailer, but weighed down by huge debt burden) look attractively valued.(HOW THEY STACK UP)
Feeling the heat
Majority of the companies in the discretionary spending space have reported disappointing growth either in volumes or revenues. Pantaloon Retail reported a low single-digit increase in top line as same store sales growth rate in its ‘Value’ and ‘Home retail’ segments was 0.4 per cent and -0.9 per cent, respectively. The ‘Lifestyle’ business also grew a mere 4.7 per cent. Same stores sales growth indicates the trend in sales of stores which have been open for at least one year.
Says Kishore Biyani, chief executive officer of the Future Group and managing director of Pantaloon Retail: “Overall, slowdown in the economy and muted consumer confidence have had their impact on sales growth.” Adds Govind Shrikhande, customer care associate and managing director, Shoppers’ Stop: “Overall economic outlook has been soft.”
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Similarly, Titan Industries’ jewellery and watch businesses reported a decline of 21 per cent and three per cent in volumes, thanks to high gold prices and steep prices hikes, respectively.
India’s largest pizza maker, Jubilant FoodWorks’ top line continued to grow at a robust pace. However, its same store sales growth has seen a declining trend in recent quarters. It came down to 22.3 per cent in the June quarter against 36.7 per cent in the year-ago period as well as the average 28 per cent growth in the previous two quarters.
Though many companies reported better operating performance due to cost control initiatives across overheads (mainly employee and advertising), the net profit margin for most companies continued to remain under pressure primarily due to high interest costs. High interest and depreciation costs saw Pantaloon’s profit before tax in the core retail business slump 92 per cent year-on-year to Rs 5.8 crore in the June quarter. Titan Industries reported single-digit growth in net profit due to higher interest and depreciation costs consequent to expansion.
Future’s not cool
Most companies across categories in the discretionary products space expect pressure on demand, pricing power or margin to continue. Says Bhaskar Bhat, managing director, Titan Industries: “Factors like high inflation, weak rupee and poor monsoon are likely to have an adverse impact on our targeted growth.” Titan Industries, while confident of maintaining its margins, has revised its FY13 sales growth guidance from 30 per cent earlier to 15-20 per cent.
Other retail companies like Pantaloon, Shoppers’ Stop and Trent are also expected to feel the heat of the tough operating environment in the form of muted same store sales growth and ramp-up at newer stores expected to be slower than before.
Players in the textiles and apparel space are treading a similar path. Gautam Hari Singhania, chairman and managing director (CMD), Raymond, says: “Short-term business environment continues to be challenging as inflation and subdued consumer sentiment remain concerns.” On the other hand, Jayesh Shah, director and chief financial officer of Arvind, has revised its revenue growth forecast marginally to 10-12 per cent due to revenue loss in the June quarter on account of strike at two of its plants and sluggish economic outlook.
Same is the case with many appliance makers. Arvind Uppal, CMD, Whirlpool of India, said in an analyst meet held in June that the industry softness was expected to continue driven by soft consumer sentiments and uncertain economic environment.
Apart from demand, companies are also facing cost pressures, say analysts. While input costs are likely to remain firm partly due to rupee volatility, high competition across categories will keep spending on advertising and promotion at elevated levels. Also, companies will have to keep investing in innovation and new product launches, as products are mainly related to fashion or lifestyle, which keeps changing constantly. This, however, isn’t unusual for them. For example, Jubilant introduced three new exotic pizzas with a new range of toppings, re-launched Pizza Mania with new toppings and added new stuffed garlic bread in the menu during the June quarter—it had also recently launched Dunkin’ Donuts restaurants. On the other hand, Titan Industries has launched Mia (jewellery for working women), Ganga collection (Tanishq) and fq (for teenagers) is under test launch.
“Competitive intensity is expected to remain intensive. Innovation and new product launches will drive next phase of growth,” says Uppal of Whirlpool. Adds Titan’s Bhat: “We will maintain our investments in brand building, retail network expansion and new product introductions to infuse confidence in consumers.”
All these suggest cost pressures will continue and impact profit growth, at least in the near-term, of most companies as the current environment remains challenging and demand is moderating.