Sluggish job growth means that consumers are likely to downtrade in their consumption. If so, will consumer products companies continue to sport high valuations?
The urban job squeeze is the biggest problem for marketing managers to increase sales in consumer products in India, says Espirito Santo Securities in its latest market update report. The lack of inclusive growth in the economy poses a structural risk to consumption, which includes spending on low ticket items. At current levels the brokerage firm observes that consumer stocks are priced to perfection and do not discount the brewing storm. The firm has recently turned bearish on the sector overall, and after the recent run-up.
Hit by global economic woes, policy paralysis and a series of political scandals, India is facing one of its worst periods of growth and unemployment, as noted by recent ASSOCHAM surveys on 32 sectors, says Espirito Santo Securities. Hiring has dropped by 20% in Q1FY13 versus Q4FY12; the financial sector that was immune to the 2008 financial crises is now very vulnerable to non-performing assets and hiring in other sunrise sectors are at levels insufficient to absorb the supply of fresh graduates coming into the work force, observes Espirito Santo Securities
FICCI’s survey suggests a drop in the business confidence index from 60.3 in Q4FY12 to 51.8 in Q1FY13. Indian consumers have become progressively more pessimistic about future prospects over the last two years (as inferred from RBI consumer confidence surveys), following negative real wage inflation (based on an analysis of BSE-200 companies) and a plunge in hiring. The market update report sees risks to overall consumption from: (a) further job losses, (b) delayed hiring in IT and financial services and (c) prolonged job search period post redundancies.
According to FICCI, the waiting period to find a job has increased from two to three months to 9-10 months, with people also settling for relatively junior positions. Slowing GDP growth, a poor monsoon and sustained inflationary pressure could provide the catalyst to temporarily reverse the virtuous consumption cycle that India has benefitted from in the past decade, i.e. as consumers lose confidence in future income, they decrease consumption. The market update report has highlighted structural risk to consumption and downgraded the consumer sector
Espirito argues that the negative real wage inflation of BSE-200 companies’ employees and the plunge in the Monster listing primarily reflect urban populations. This is distressing as the majority of sales for the FMCG sector are generated in urban markets. Investors have chosen to hide in the consumer sector and trades are getting crowded. Downtrading in essentials and prolonged delays in discretionary spending will lead companies to take price cuts and increase advertising and sales promotion (A&P), thus affecting the bottomline. The imminent slowdown in the consumer sector may result in ‘defensive sector’ losing its crown, according to Espirito Santo Securities
The analysts opine that in times of continued uncertainty and concern around corporate governance, investors are playing it safe and focusing on a narrow list of companies in the consumer sector, and flow into those names is causing P/E (price-to-earnings ratio) expansion, rather than an expectation of increases in earnings or any underlying change in the industry to merit a major expansion in the multiple.
Further, according to the analysts, the BSE FMCG index has outperformed the broader market by about 17% YTD (year-to-date), despite starting the year on already high multiples (consensus 12-month forward P/E of 24.6 times). Several companies (like Emami and Godrej Consumer Products) have been top performers, and the P/E rerating has meant the stocks have outperformed the market.
If the cash component in the society goes down, it will help solve a lot of problems like the rampant corruption, monetary policy transmission issues and cash management for banks at the operational level, feels the central bank
The development has put the BCCI in a quandary as it was expecting Deccan Chargers to resolve its financial problems by finding a buyer for itself