Poor demand may dampen festive mood despite tax cut
The slowest economic growth in 6 years may affect sales
MUMBAI: Poor demand from Indian consumers could dampen the mood during festivals next month, especially for automobile makers and retailers that count on the season for a sales boost, analysts predict.
Indians typically buy everything from new cars to shoes for themselves and as gifts during celebrations steeped in religion and tradition. Yet the slowest economic growth in six years, unemployment at a 45-year high and tepid private consumption may see sales fall short of recent years, even after the government’s $20 billion tax break to companies earlier this month.
“You can make the product 50% cheaper, but there has to be income to spend,” said Nitin Gupta, an analyst at SBICAP Securities Ltd in Mumbai. “In the short-term, I don’t see any kind of an income boost. Rather than giving cash to individuals, they have given it to companies.”
Car sales in August fell the most on record and Maruti Suzuki India Ltd Friday reduced the price on its Baleno RS model by ₹1 lakh to pass on the benefit from the tax cut.
Market researcher Nielsen has lowered its 2019 growth estimate for fast-moving goods to 9%-10% from 11%-12%, while a stock gauge of consumer discretionary firms is set for its first annual back-to-back losses since at least 2005.
Even so, the industry’s fortunes beyond the approaching festival season are poised to improve, according to BNP Paribas SA. Plentiful rainfall seen this monsoon season and cash handouts to farmers will help lift rural incomes, helping sales of staples recover in the second half of the year that began April 1, the brokerage said in a recent report.
SBICAP Securities’ Gupta said, “The festive season is likely to be dull. Consumption is hit and household income has to increase for there to be better demand for companies selling fast-moving consumer goods. Corporate tax cuts are a long-term phenomena and won’t help in the short term. It’s uncertain how much companies could pass on the benefit in terms of lower prices.”
Aditya Soman and Aditya Gupta, analysts at Goldman Sachs Group Inc. said that they don’t expect a significant change in underlying demand trends across categories and geographies in Q2. “We would look for colour on festive demand outlook especially given the normal monsoon which could have a positive impact on demand,” in Q2 earnings calls
Harshit Kapadia, an analyst at Elara Securities India said, “I’m not expecting a blockbuster festive season. It won’t be muted either, but will be decent. Even last year demand was largely flat, that’s why double-digit growth in demand on the lower end is possible. Distributors are preparing for the Navratri and Diwali season, but nobody is stocking up heavily. They are following the normal trend of keeping 15-20 days of inventory, whereas in past years they would keep 30-35 days ahead of the festival season.”
Ravi Swaminathan, an analyst at Spark Capital Pte said, “Sales growth in refrigerators and washing machines has been moderate (mid to high single digit). With early festive demand traction not very encouraging, dealers are hopeful for better traction over the next 2-3 months.”
Basudeb Banerjee, an analyst at Ambit Capital Pvt. Ltd said, “The best case scenario for automobiles is for demand to remain flattish on a year-on-year basis as last festival season was bad for demand. Things have gotten worse since then. Investors should avoid commercial vehicles and producers of lower-cost two wheelers, which face a bigger inventory pileup.”
Banerjee recommends selling Hero MotoCorp Ltd., Ashok Leyland Ltd and Tata Motors shares, buying Eicher Motors Ltd, Bajaj Auto Ltd and Maruti Suzuki India Ltd.
Shirish Pardeshi, an analyst at Centrum Broking Ltd said, “Demand is there, it’s only the size of the wallet that’s come down. In difficult times, people don’t stop buying the product. If someone was buying a large pack before, maybe they’ll buy a small pack now. In the festive season people tend to forget the bad times.”