By Tejas MDIn June this year, the US narrowly escaped a debt default, as its government made the deadline just in time to raise the debt ceiling. Now, the country's infamously high debt level (an eye-watering $32.7 trillion, 121.2% of its March 2023 GDP) is again in the news, after global rating agency Fitch downgraded the US credit rating to AA+ from AAA on August 2.
Fitch flagged concerns over the rising debt burden and the inability among American politicians to reach an agreement to bring down debt.
This rating change had a ripple effect on global equity markets, reminding us that when the US sneezes, the world catches a cold.
But the effect of the downgrade is being felt far less in one country: India. Here, it's a temporary setback. Morgan Stanley just upgraded India’s rating to ‘Overweight’, and raised the country’s market position from sixth to first. The brokerage believes that the country is poised for sustained economic growth with a strong capex and profit outlook.
This upgrade comes just four months after Morgan Stanley raised India from ‘underweight’ to ‘equal weight’ on March 31. It marks how fat we have come - just a decade ago, Morgan Stanley had labelled India one of the 'Fragile Five' and 'risky' for foreign investments.
A key driver for this growth is a big shift in India’s income pyramid. India is projected to change in the next decade from a poor-dominant country to a middle-class dominant one.
Source: ICE360
Such transformation for a country happens only once in several generations. In Europe, this shift happened post World War-II in the 1950s and 1960s, when Europe's economies grew at 6-8% a year. The growth propelled some European businesses into worldwide fame - France's fashion labels, Germany's car makers, Italy's clothing companies went from regional, family-owned businesses to international brands: Chanel, Volkswagen, Gucci. The US saw similar income growth and disruption between 1955 and 1970.
For India, this change will bring many millions of Indians out of poverty, with more than 100 million people moving to middle-income households, and 20 million to rich households. This will lead to a rapid rise in consumption and spending. India's consumers are changing fast.
The winners of this shift? Yet to be decided.
In this week’s Analyticks,
- In the midst of change: India’s consumers are seeing four big trends
- Deep pockets screener: Stocks with increasing annual operating cash flow, and operating profit margin
Four trends are changing the Indian consumer story
The world is expected to add another billion consumers over the next eight years. The Data Lab defines this 'consumer' as those spending at least $12 per day (measured using 2017 purchasing power parity or PPP prices).
Even as the global consumer class grows, some countries will see a decline due to aging populations and lower fertility rates – a list that includes Japan and several European countries. From 2022 to 2030, Japan is expected to lose 4 million consumers, while Italy’s and Germany’s consumer population could shrink as well.
Asia is projected to contribute around 82% of new consumers in 2024, with India and China jointly accounting for over half of this increase. As China’s population ages, India will surpass it in new additions to the consumer class. Consequently, India is on track to becoming the leading global driver of consumer growth. Given this, we look at four key trends that are reshaping the Indian consumer story.
Trend 1: D2C and local brands are challenging FMCG giants
The Direct-to-Consumer (D2C) market in India is growing fast, and is expected to reach $100 billion by 2025. Several smaller and local players here are competing with the big guns. This ant vs elephant battle has seen some unexpected gains for small competitors, which are stealing market share from big FMCG companies.
Smaller players are doing this by disrupting the traditional distribution channels, and selling lower-priced products without any middleman. Karnataka's Teju Masala for instance, which started off selling spices from a moped in the local market, is growing at 65% annually; Delhi-based, Virat-Kohli backed RageCoffee is in 32 cities and claims to be growing at 3X in demand and production.
The rapid rise in online shoppers is helping D2C businesses. India gained125 million online shoppers in the past three years, with another 80 million projected to join by 2025.
To counter this, FMCG majors like Nestle are now focussing on e-commerce sales. Suresh Narayanan, Nestle India's Chairman and Managing Director said, “E-commerce continues to perform strongly and accounts for almost 6.5% of sales in Q1FY24 with quick commerce driving the growth”. Meanwhile, Dabur is planning to acquire D2C companies to tap into this segment. In the Q1FY24 earnings call, Mohit Malhotra, CEO of Dabur said, “We are scouting for D2C brands. If we come across a company which is synergistic to us, we will evaluate and if it seems financially worthwhile, we will acquire the company.”
Listed FMCG majors also face competition from local brands. Volume growth for local brands (+12.7% YoY in FY23) outpaced national brands(+8.5% YoY in FY23).
During the Q1FY24 Earnings call, Hindustan Unilever's CFO Ritesh Tiwari agreed with the numbers, “Small players are growing faster than the large players - this is evident from the latest quarter’s data."
Trend 2: Rise of the ‘mass’ consumer class
A recent Redseer survey reveals the rise of a mass consumer class (annual income between Rs 2.5-10 lakh), besides the affluent (> Rs 10 lakh) and striver (< Rs 2.5 lakh) classes.
The Indian retail industry is projected to grow at a CAGR of 10% to reach $2 trillion by 2030. Within this growth story, mass consumers are expected to contribute 65% to the overall retail market by 2030. This segment is also set to grow the fastest, with a CAGR of nearly 12%.
Nearly 60% of these mass consumers are willing to buy unbranded products, if they get the right value. The willingness to switch from big FMCG brands to smaller alternatives is pushing major FMCG companies to rethink their strategies.
Trend 3: Rise of the nuclear family drives premium FMCG demand
One would assume that India’s joint families, which usually consist of around seven people, would spend more compared to nuclear families, which have an average of three people. But it’s the nuclear families that are shelling out more money each month,due to their preference for premium products.
South India leads when it comes to the rise of nuclear families, with 69% of households classified as nuclear in 2022. However, in North India, joint families are still the majority.
Nuclear families make up 50% of Indian households in 2022, a big shift from a 34% share in 2008. This development bodes well for companies following the ‘premiumization’ trend.
Trend 4: Tier 2 and 3 cities drive growth in consumer spends
According to reports, Tier II and III cities drove consumer purchases during the Diwali season, accounting for 64 per cent of all transactions. Almost 125 million customers placed orders across platforms during this period, with a significant boost from Tier II cities.
In addition, rural demand is making a comeback, as inflation eased over the past two quarters.
Sanjay Agarwal, CFO of Jyothi Labs said, “The impact of inflation in rural areas has been much higher than urban. And as inflation has been receding, growth that we are seeing in rural is coming back.”
With all these trends in play amid a fast-growing consumer class, major FMCG companies have some tough decisions to make. Big companies are typically slowwhen it comes to adapting to change, especially when competing with disruptive trends and new-age brands.
However, this disruption is great for Indian consumers - it brings innovation to both sides of the income scale. As families shift towards nuclear structures, product premiumization gains traction; while the rise of the mass consumer class helps value-driven brands.
And as the consumer space sees more competition, a few homegrown Indian brands are likely to become truly big, mirroring the trends we saw in US and Europe half a century ago.
Screener: Stocks with bumper cash in hand, with increasing cash flow and profit margins
Cash flow from operating activities is an important measure for a company - having surplus cash from operations allows it to invest in new projects, repay loans and launch new products. This screener shows stocks that have seen a YoY rise in their annual cash flow from operations and operating profit margin.
The screener has 38 stocks from the Nifty 500 and seven stocks from the Nifty 50 index. It is dominated by stocks from the automobile & auto components, banking and chemicals & petrochemicals sectors. Major stocks that appear in the screener are Chalet Hotels, Indian Hotels, ICICI Lombard General Insurance, Lupin, Fine Organic Industriesand Dr Reddy’s Laboratories.
Chalet Hotels and Indian Hotels lead this pack with a 19.9 and 17.7 percentage points YoY rise in operating profit margin in FY23, respectively. This improvement is compared to a low base in FY21 and FY22, due to the Covid lockdown. Chalet Hotels also saw its cash flow from operating activities improve to Rs 476.9 crore in FY23, compared to Rs 62.2 crore in FY22. The company has implemented cost management processes, resulting in reduced real estate development costs and higher cash flow from operating activities.
Indian Hotels saw its cash flow from operating activities jump to Rs 1,619 crore in FY23 from Rs 671.6 crore in FY22. This was on the back of what the company called a disciplined approach to capital allocation, which reduced provisions and finance costs.
ICICI Lombard General Insurance's cash flow also improved to Rs 2,290.1 crore in FY23from Rs 809.1 crore in FY22. It is the only stock in the screener which turned an operating loss in FY22 into an operating profit in FY23, with an operating profit margin of 7.1%. The insurance company’s rise in cash flow was aided by an increase in premiums and advanced premiums received from policyholders.
You can find some popular screeners here.
