Is India completely spent?

Wed, 23 Nov Pre-Open

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2011 has been one of the worst years for the Indian stock markets. After reaching their peaks in December 2010, global worries and the impending slowdown have weighed heavily on the bourses. But, there has been one light shining brightly through the darkness. The BSE-Fast Moving Consumer Goods (FMCG) index has been one of the best performers over the past year. While the BSE-Sensex is down around 22% year to date (YTD), the FMCG index has been able to see positive returns of 9%. A lot of this has had to do with India's billion strong population and its robust consumption story. But, is the darling of 2011 about to go bust itself?

Things have really changed since last year. Thirteen rate hikes have weighed on the banking system and now issues of asset quality have come to the fore. Stubborn inflation has also stifled spending. The rural consumer typically spends a major part of his income on food. With food inflation in double digits, spending on discretionary items has taken a hit.

According to an article by Firstpost other threats to the system are also slowly becoming visible. The hiring index has also seen a larger dip in October 2011, compared to the past two years. The government has an ambitious target of maintaining a 4.6% fiscal deficit this fiscal although Mr Montek Singh Ahluwalia recently highlighted the difficulty of sticking to this target. Indeed, it has barely been able to rake up any money from selling stakes in PSUs companies. Its disinvestment target of Rs 400 bn, once again remains on paper. If the government also stops spending, or even cuts back, it may spell more trouble for the economy and consumption could take a hit.

FMCG companies may see tough times going forward. Demand for discretionary items is seeing a slowdown. High input prices, especially food grains are contracting their margins and working capital requirements. New product launches have been delayed and even advertising budgets have been cut. Thus the pipeline of growth is shrinking. But there may be a few strategies that could work.

According to CLSA, India has to cater to its two biggest segments of consumers completely differently. Urban consumers need to be targeted with premium products. This will help companies to achieve higher realisations and better margins. For the rural segments distribution is the key. Having your product available in India's 8,000 towns and 6 lakh plus villages can do wonders for your brand. We believe that the bigger FMCG companies like ITC and Hindustan Unilever (HUL) will be better able to capitalize on these points. If they do so, then maybe FMCG stocks can lead the recovery as well as well as they beat the crash.