Over the past few quarters, consumer spending has declined significantly. Growth of private household consumption expenditure dipped to a five-year low of 1.6 per cent in Q1 of FY’14. Weak economic activity, as indicated by weak IIP data, and high inflation are responsible for the moderation in consumer demand. The decline in spending is more severe in urban than in rural India. Going forward, rural consumption is expected to improve following good monsoons coupled with government spending in social benefit programmes but urban spending is expected to remain weak. However, despite the grim picture, mid-cap consumer companies have shown resilience and posted relatively lower moderation in growth than large-cap companies. CRISIL Research says it is confident that select mid-cap consumer companies have good long-term growth prospects driven by healthy business fundamentals.
Growth moderation in consumer space but mid-caps show resilience
Growth in the consumer space has moderated from 24 per cent in Q1FY12 and 20 per cent in Q1FY13 to 13 per cent in Q1FY14. The moderation is more apparent in large consumer companies as average growth in large consumer discretionary group and consumer staples has moderated from 25 per cent in Q1FY13 to 14 per cent in Q1FY14 and from 18 per cent in Q FY13 to 12 per cent in Q1FY14, respectively.
In contrast, the mid-cap consumer group has witnessed relatively lower moderation in growth – from 23 per cent in Q1FY13 to 19 per cent in Q4FY13, which again improved to 21 per cent in Q1FY14. We attribute this resilience to their strong market position, attractive market opportunity and shift from the unorganised to organised segment in their respective industries.
select mid-cap consumer companies to register strong earnings growth
Select mid-cap consumer companies have good long-term growth prospects, largely driven by healthy business fundamentals and attractive market opportunity. Under CRISIL Research coverage, the mid-cap consumer companies are expected to post healthy revenue CAGR of 18 per cent and a PAT CAGR of 20 per cent over the next four years. These companies have strong market position led by well-known brands and wide distribution network which gives them reach to smaller cities.