Nomura report says slowdown could lead developers to cut prices in the coming festive season, but this will be easier on new launches rather than existing projects
There has been a sharp 30% drop in registrations of property sales in Mumbai in June 2011 year-on-year, which confirms the worsening slowdown in the realty sector in the country's commercial capital.
According to an industry note by Nomura Financial Advisory and Securities, while high prices continue to deter new purchasers, it now seems that approvals for new projects are also slipping, resulting in a lower number of registrations.
Overall, in the first half of the year (January to June 2011), property registrations were down 20% year-on-year, in Mumbai, Nomura stated in the note published last week. A total 684 property purchase agreements were registered in the six-month period.
Brokerages say demand has been stable in the first quarter, although softening is visible in some categories and this could spread to other areas in the second half as prices harden
The fast moving consumer goods (FMCG) sector, which is dominated by some large Indian companies and multinationals, is likely to maintain revenue growth on steady demand in the first quarter of fiscal 2011-12, but profits would to be affected by increased costs, according to various brokerages.
Several companies are making various attempts to cut costs, like curtailing promotional expenses, according to KR Chowksey. With the competition stiffening, companies particularly in the personal products and processed foods segments have launched new products to try and grow market share.
Motilal Oswal Securities (MOSL) estimates that the packaged goods sector will post a 20% revenue growth (aggregate Rs23,400 crore) and profit after tax (PAT) will grow by 17% (aggregate Rs3,200 crore) in the first quarter. IDFC Securities has projected revenue growth for the sector a touch lower at 19.2% and PAT growth a couple of notches down at 16.3%.
According to MOSL, the demand environment has been stable, although volume growth in a couple of categories like coconut oil and malted food drinks has shown signs of softening. It says that further price increases in the second half of the year could result in softening in other categories as well.
This could affect most companies except ITC, United Spirits and GSK Consumer and margins would be stressed despite the price increases. MOSL expects a decline in margins for 10 of the 12 companies in its coverage universe and believes that investors will have to be cautious as stiff competition and margin pressures persist.
IDFC says more than half of the sales growth in the packages goods sector will be driven by the impact of acquisitions (Sara Lee, Megasari, etc) by Godrej Consumer and a third by Dabur (Hobi Kozmetik's personal care products and Namaste Laboratories' hair care range).
The best performances will come from niche players, like ITC and Pidlite, that have strong pricing power and greater visibility on volume growth and profitability, MOSL says. Godrej Consumer will see acquisition led growth through the low-margin acquisitions in Latin America and Africa.
The brokerage estimates ITC to post 18% sales growth (estimated sales of Rs5,720 crore - 8% cigarette volume growth) and 23% PAT growth (Rs1,320 crore). Pidlite is expected to see sales grow by 24% (Rs780 crore) and profit growth at 15.7% (Rs125 crore).
In the major processed foods business, Cadbury-Kraft launched Tang in the ready-to-mix category, GSK Consumer introduced Boost Glucose, Hindustan Unilever came up with Kissan Creamy Spread and Dabur served Hajmola Mint Masti. In the personal products categories, Dabur came launched Fem Safe Handz and Godrej Consumer relaunched Expert Hair Colour.
Contrary to the general perception that a good monsoon has a positive impact, brokerages suggest that stock markets have performed well even when there was average to above average rainfall. In addition, demand and consumption, especially in the rural market, and the health of government finances remained intact irrespective of the monsoon
In India, agriculture is the mainstay of about 58% of the rural population and contributes to a little below 15% of the gross domestic product (GDP). It is therefore assumed that a good monsoon would always have a good impact on the economy and in turn on the markets. However, over the past few years the markets have performed well when there was average to above average rainfall.
According to a research report by ICICI Securities, in the past decade, on five out of six times when India saw an average-to-above average monsoon, the Sensex posted strong gains June through October, with the only exception being in 2008.
"Good monsoons are linked to strong rural demand in sectors such as autos, fast-moving consumer goods (FMCG) and a possible pick-up in construction activity. However, our study points to a different reality, the link between monsoons and the demand impetus is at best tenuous. Further, monsoons do not seem to have a significant bearing on the health of the state governments' finances or capital formation," the report said.
In the past decade, on each of the four occasions when monsoons were moderate to good, agricultural growth was strong. Typically, a good monsoon has helped in keeping inflation under check. However, bad monsoons or deficit rainfall does not necessarily mean high inflation as extraneous factors such as crude oil prices come into play, the brokerage added.
During FY2011, for the first time in 10 years, both the Southwest (SW) and Northeast (NE) monsoon surpassed their respective long period averages (LPAs) improving reservoir levels significantly, which bodes well for kharif. The current storage is more than the last year's position of 21.54 billion cubic meters (BCM) and the average of the last 10 years' storage of 20.52 BCM.
In its latest update (1st July), the Indian Meteorological Department has said that the all India rainfall during the week to 29th June was 10% above the LPA and cumulative rainfall up to 29th June was 11% above the LPA, with normal/excess rainfall activity over all the four homogeneous regions. In the period 1st June to 29th June, out of 36 meteorological sub-divisions, the rainfall has been excess over 17 sub-divisions, normal over nine, deficient in eight and scanty in two sub-divisions. In the area-wise distribution, 74% of the country has received excess or normal rainfall and the remaining 26% area has received deficient or scanty rainfall. About 65% of the total districts in the country have received excess or normal rainfall, the Met department said.
According to ENAM Securities, a normal monsoon in FY2012E is likely to improve agricultural output prospects and ease food inflationary pressures. It must be noted that the monsoon alone cannot douse inflationary fires and the government needs urgent policy reform and fiscal stabilisation. Hence, further progress and spatial monsoon distribution will hold the key. Thus far, the monsoon seems to be progressing as per the expected timeline, the brokerage said.
The Met department has also revised its forecast for this year's monsoon to 95%, from 98% of the LPA. This implies that the whole SW monsoon season, between June and September, would most likely witness sub-normal rainfall of about 90%-96% of the LPA with a model error of +/- 4%.
"The figure of 95% rainfall forecast for this year is not alarming, but the monsoon's behaviour during the crucial month of July holds the key to the output of the summer crops, including rice, as most of the plantings take place during this month," Sharekhan said in a research report. While a good monsoon boosts sentiments across the strata, it may not be the only reason for good demand and consumption. Especially, rural demand and consumption have so far remained alienated from rainfall, whether good or average. Alternative revenue sources and easy switch to industry have lowered the impact of rains in the rural markets. The National Rural Employment Guarantee Scheme (NREGS) has increased rural household incomes apart from providing employment. The population at the bottom of the pyramid can also switch easily to other industries, which are facing manpower shortage. Traditional sources like animal husbandry are also gaining due to productivity enhancement and are yielding very attractive returns.
In addition, the onslaught of the media, developed infrastructure and the farmers' own urban experiences have given rise to a dramatic shift in consumption behaviour. Companies across the board from automobiles and FMCG to consumer durables, are expanding reach and fuelling discretionary spending through innovative pricing and packaging. The rural consumption theme would remain strong and inflation is more likely to eat into savings," Sharekhan noted.
According to ICICI Securities, sales of FMCG and consumer durables are primarily driven by lifestyle changes, disposable incomes and economic growth and much less by monsoons. Similarly, the monsoon has little impact on discretionary and non-discretionary spending and post rainy season activities. Cement dispatches, a proxy for real estate and construction activity, are less conditional on monsoons and more on broad economic activity, the brokerage added.
While a good monsoon has potential to boost total agricultural output, an average or above average monsoon provides a chance to improve incomes. According to Sharekhan, hypothetically, a normal monsoon and a bumper crop mean most produce being sold at minimum support prices (MSPs) and zero inventory gain. On the other hand a scarce monsoon means higher market prices, but little crop to be sold. However, a sub-normal monsoon combines the positives of both the worlds as price per unit sold would jump much more than the MSP and there would be potential inventory gains too, the brokerage said.
Though stock market returns and the monsoon have a strong correlation, the effect of the monsoon on the broad economy is less pronounced. However, the dwindling contribution from the agriculture sector to the GDP is a worrisome factor, that too when over 58.4% of the country's population is dependent on it for its livelihood. Over the last decade, the agriculture sector's contribution to overall GDP has fallen to under 15% from 24%. Low and volatile growth rates and the recent escalation of the agrarian crisis in several parts of the country, are a threat not only to national food security, but also to the economic well-being of the nation as a whole.