FIRMS OUT OF CASH CRUNCH SHADOW

Consumer goods makers have recovered lost ground since the cash crunch that followed the government’s decision to demonetise ~500 and ~1,000 currency notes on November 8, 2016. However, the industry is yet to get back its mojo.

The combined net profits of consumer goods companies were up 8.4 per cent, year-on-year, during the September quarter, growing most in the last three quarters. But this much slower than the rates the industry was clocking before the note ban. The industry’s net profit had grown at an average 21 per cent, year-on-year, during the eight quarters preceding November 8, 2016.

Combined net sales were up 13.9 per cent, year-on-year, during the second quarter of 2017-18, growing most in the last 12 quarters, suggesting the economic disruption caused by the note ban and the roll-out of the goods and services tax (GST) in July was behind them. “Demand for consumer goods has made a comeback and normalcy in wholesale and retail businesses has been restored. Sales of major consumer goods companies have accelerated in the recent quarter,” said Chandrajit Banerjee, director-general of the Confederation of Indian Industry. Analysts said companies also gained from an early onset of the festival season this year and a demand boost from higher spending by the central and state governments.

“The government has attempted to pump prime the economy through measures such as higher public spending, farm loan waivers and higher foodgrain prices. This has aided consumer demand in the current fiscal year and cushioned the negative impact of the note ban," said Dhananjay Sinha, head of research, Emkay Global Financial Services.

He said the cyclical recovery in demand would last for a few quarters more but expressed doubts its longevity due to its adverse implications on the fiscal and current account deficits.

Banerjee added that the rural sector, too, was doing well, with demand reviving after a good monsoon and due to the farm loan waivers.

Fast-moving consumer goods (FMCG) companies such as Hindustan Unilever, Asian Paints, Dabur India and Colgate Palmolive have witnessed a quicker recovery in revenue and profit than consumer durables and automobile makers.

The combined net sales of FMCG companies were up 10.5 per cent, year on year, during the second quarter of 2017-18, growing most in 12 quarters. The combined net profits of these firms rose 11.9 per cent, their quickest pace in the last four quarters and a sharp turnaround from the 4.1 per cent decline in the June quarter.

In comparison, the combined net sales of durables and automobile makers were up 15.9 per cent, year on year, during the second quarter, growing most since July-September 2016, when sales grew 18.2 per cent. Their combined net profits were up 6.2 per cent, the highest in the last three quarters. The dichotomy in revenue and profit growth is attributed to a steeper rise in operating costs, including raw material costs. The analysis is based on the quarterly results of 40 listed consumer goods companies in sectors such as FMCG, consumer durables, alcoholic and non-alcoholic beverages, twowheelers, passenger cars, footwear and garments. The sample includes only companies whose results are available for the last six years.

A recovery in the second quarter notwithstanding, there is a risk of consumer demand settling at a lower level of equilibrium than in the past. This is especially true in consumer durables, which require robust growth in household incomes to induce purchases. “The immediate impact of the note ban was felt by the unorganised sector as the cash crunch hit its production and income. It affected consumer demand as the informal economy is the largest employer in absolute numbers. This sector continues to struggle, which may keep demand depressed for at least a few quarters more,” said Devendra Pant, chief economist and head of public finance, India Ratings.