P/E is the company’s share price divided by earnings per share, and indicates how many times the profit an investor is paying for the stock.
Management of some consumer companies such as Dabur have also recently indicated their concern over slowdown in overall consumer demand. Not only urban, but rural growth has also tapered despite a strong stimulus by the government. Rural growth is now 1.15 times faster than urban versus 1.3 times earlier. A likely delay in implementation of government’s rural boosting schemes such as Pradhan Mantri Kisan Samman Nidhi Yojana, a direct income transfer scheme for farmers, and subdued crop prices are likely to have pulled down growth from the hinterland.
For instance, as per Edelweiss Securities, not even 25 per cent of the expected 120 million beneficial families have received first tranche of the payout under this scheme as others are under the validation process.
Besides, a change in climatic conditions i.e. prolonged winter troubling sale of summer-centric products and impact of liquidity crisis of September last year are among other factors disturbing consumption demand. Also, Credit Suisse says the tailwinds from the GST rate cuts of November 2017, which benefited companies like Hindustan Unilever in term of offering extra volumes, are now in the base.
This high base could be another drag on volume growth. Many consumer companies have continuously reported high single to double digit volume growth in past quarters. So, the demand moderation is likely to be double whammy. Firstly, with such demand scenario the companies may not afford to take price hikes to protect their overall topline. Also, many companies would focus on market share gains going ahead, as indicated by some major FMCG players such as Marico and Dabur. This would warrant additional advertising and promotional spends and would weigh on operating profit margin.
As per Credit Suisse, there is a clear increase in thrust on consumer promotions from many companies. Expanding margins will be tough in the current environment as there are no tailwinds on input costs and the low revenue growth does not give much operating leverage.
However, analysts do not see the dismal demand situation to be structural. Post the central election in India, demand would fire up again, once direct transfer schemes are fully implemented and given the expected better monsoon and improving distribution reach among others, say analysts at Edelweiss Securities. Focus on e-commerce would also support growth in the longer run.
Overall, long-term investors are recommended to be selective while bottom fishing till the shadow of slowing growth clears. While Marico and Britannia are top picks of some analysts from consumer staples, Asian Paints, Titan and Pidilite top the list from the discretionary pack.