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  1. Consumption demand: Is the worst over?

Consumption demand: Is the worst over?

Analysis of GDP growth and FMCG demand reveals consumption demand for consumer staples trails GDP growth by at least 9-12 months.

By: | Updated: May 25, 2015 9:47 AM
Management commentary on demand is shady.

Management commentary on demand is shade positive.

Demand outlook: Hope and fear

*  Consumption demand, until recently, was seeing a continuous decline despite lower inflation and improved “consumer sentiment”: However, Q4 results imply demand in at least consumer staples has bottomed out
* Early trends from Q4FY15 results point out that slide in volume growth in consumer staples has been arrested. We see normal demand in staples returning in H2FY17 with the assumption economy picks up in H2FY16
* Consumer discretionary: Q4 trends imply volume growth in categories like 2W, watches, jewellery, QSR and many other categories is still very weak but is a shade better in categories like paints and 4 wheelers
* Weak discretionary demand implies urban demand is weak. Rural demand is better but unseasonal rains, lower government spends and probability of a second weak monsoon is building up fear
* Bottom line: The worst is possibly over (if monsoon is normal) but it would be a long wait before the party begins

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Consumer demand to follow macro uptick with a lag

* Analysis of GDP growth and FMCG demand reveals consumption demand for consumer staples trails GDP growth by at least 9-12 months. In FY04 GDP growth rebounded to 8.5% but FMCG value growth was muted at 2%, shadow-ing muted economic growth for FY01-03. Similarly, FMCG demand fell in H2FY13 even though the economy had started slowing down much earlier
* While economy may see an uptick in H2FY16, a full-fledged demand recovery in FMCG will be visible only in H2FY17
* What could go wrong? Although we expect demand recovery in FY17, the following can delay demand recovery: (a) unseasonal rains, (b) low increase in MSP for crops, (c) weaker rural wage increase and (d) possible monsoon failure

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Consumer demand to follow macro uptick with a lag

* Our analysis of GDP growth and FMCG demand reveals that consumption demand for consumer staples trails GDP growth by at least 9-12 months. For instance, in FY04 GDP growth rebounded to 8.5% but FMCG value growth was muted at 2%, shadowing muted economic growth for the period from FY01-03. Similarly, FMCG demand fell only in H2FY13 even though the economy had started slowing down much earlier
* While economy may see an uptick in H2FY16, a full-fledged demand recovery in FMCG will be visible only in H2FY17
* What could go wrong? Although we expect demand recovery in FY17, we believe the following risks can delay it: (a) unseasonal rains, (b) low increase in MSP for crops, (c) weaker rural wage increase and (d) possible monsoon failure

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