Rural demand under a cloud, no stimulus likely; vital that jobs-scenario improves and transport, hospitality, etc, recover
With input costs starting to pinch and rural demand expected to be somewhat subdued, it looks like corporate India will need to fight several headwinds in FY22. Already, results for the June quarter may have been hit somewhat by the local lockdowns, though, going by the numbers put out by the early birds, they are not the washout they were in Q1FY21. Players in the commodity space are clearly enjoying the global rally in prices. However, it is not as smooth a ride for consumer-oriented businesses, where stronger brands are able to wean away market share from players (both in the organised and unorganised sectors) but where others are hard-pressed to grow volumes.
What stands out in the first crop of results is that, even after the considerable cost-cutting in FY21, companies continue to eke out savings by trimming expenses. A study of a sample of 169 companies (excluding banks and financials) showed operating profit margins expanded by a substantial 440 basis points year-on-year because expenditure increased by a much smaller pace than revenues.
While sales and profits in Q1FY22 have seen a big jump over Q1FY21, when the nationwide lockdown was in full force, seen sequentially, the performance is less exciting. The local lockdowns have clearly impacted both construction and consumption activity, resulting in a fall in volumes quarter-on-quarter (q-o-q) at firms like Ultratech where they fell 23% and JSW Steel where they were down 11%.
To be sure, companies have been able to offset the smaller volumes by raising prices, but, for most, revenues have also fallen. Retail businesses too were impacted; at Avenue Supermarts, revenues were down 31% q-o-q while volume growth at Hindustan Unilever has come in below expectations. The worry, this time around, is that demand from the hinterland might not prove to be as strong as it was last year given many rural areas were badly hit during the second wave. The monsoon has been somewhat uneven so far, giving rise to apprehensions the kharif crop could be affected.
The severe floods in some parts of the country—like Maharashtra—could also hurt demand. Lenders like Mahindra & Mahindra Financial Services, which have a fair bit of exposure to rural India, have been reporting very poor numbers for several quarters now. While the unemployment rate rose in the week to July 25, the rise was particularly sharp in rural areas—going up from 5.1% to 6.75%. Unless the government comes up with a stimulus package—this seems very unlikely going by the finance secretary’s statement last week—rural demand could remain muted, capping sales growth at consumer firms.
To be sure, the stable disposable incomes from those employed in sectors such as IT, e- commerce, BFSI, and government will hold up consumption. Nonetheless, it is also a fact that retail sales of both cars and two-wheelers aren’t yet growing meaningfully relative to FY20.
With vaccinations progressing, albeit at a very slow pace, business activity should start looking up soon unless a third wave of the pandemic disrupts life. While pent-up demand isn’t likely to match the levels seen post the first lockdown in 2020, the festive season should see consumption spends improve meaningfully. Nomura’s recovery tracker is at levels seen prior to the second wave, but unless the unemployment situation improves and sectors such as transport, hospitality, retail trade and restaurants recover soon, consumption demand will remain muted. Premium and high-end brands will do well but products in the affordable category might feel the pressure.