By Deeksha JanianiDoes it feel like you are living in an economy with a growth rate of 7% - among the fastest in the world? The answer may depend on who you ask.
RBI Governor Shaktikanta Das would be among those saying, "Yes, totally." Speaking at the recent RBI meet, he noted, “Economic activity saw momentum in Q4, based on our high-frequency indicators. I will not be surprised if India's GDP growth is slightly more than 7%.”
On the other side is a top executive running a consumer-facing business in India. At a CNBC TV18 conference, Anuj Poddar, CEO at Bajaj Electricals, highlighted the challenge of achieving growth for the business, saying, “You don’t know how tough it is to get these growth numbers. For the past 4-6 quarters, we have seen a lack of correlation between GDP growth and actual demand.”
One reason for this disconnect between the economic numbers and consumer behavior on the ground, according to Poddar, is demand weakness at the median income level.
If we look at the change in people's income between FY16 and FY21, middle-income groups and below have seen a fall. The fruits of India's GDP growth aren't being evenly distributed – the richest have seen the most gains, while the poorest are worse off than before.
Starting from early 2022, it was the higher-income millennials who were driving discretionary spending. Retailers targeting premium consumers enjoyed the benefits. But that spending frenzy has now normalized– how many designer bags can a person buy, after all – and there's been an overall slowdown in private consumption.
Analyst house Jefferies notes that consumer demand has been mixed across categories.
So what's going on? We take a closer look in this week’s Analyticks:
- Is the party over? Retailers, restaurant chains, jewelry companies see demand slowing down in Q4, but hopes are alive
- Screener: Consumer-oriented companies outperforming their sectors in Q4FY23
Discretionary space sees demand slowdown, but CEOs are hopeful
According to the Retailers Association of India, retail sales experienced double-digit growth through most of 2022, and until February 2023. However, the growth rate fell to just 6% in March and April due to declines in the beauty and personal care, footwear, apparel, and jewelry segments.
The decline in discretionary demand started in the second half of FY23 and became more pronounced from February onwards. High inflation was a major factor here, and was especially intense in the value segments, and in tier 2 and 3 cities. These demand-side challenges and higher costs hit the bottom-line growth of retailers and restaurants in Q4. Jewelry makers in comparison, did much better.
Indian retailers: Revenue growth holds up but profit growth falters
Big and diversified retailers like Reliance Retail (part of Reliance Industries) and D-Mart posted healthy revenue growth in Q4, thanks to a low base in last year’s quarter and store expansions. The store count for these players rose by over 14% YoY in Q4FY23.
For Reliance Retail, the store area in million sqft terms jumped by over 55% in Q4, indicating that growth in the top line was primarily thanks to aggressive expansions, while same-store sales growth contributed little.
Among major categories, the grocery segment grew the fastest in Q4, while the fashion and lifestyle segment, which is discretionary by nature, saw softer YoY sales growth of 19%, despite the low base effect.
Even with strong revenue growth, the net profit growth for big retailers was modest at best. D-mart's margins were impacted by lower contributions from the general merchandise and apparel segment.Meanwhile, Reliance Retail faced profit growth challenges due to higher expenses from rapid expansions.
Some fashion retailers were badly hit. Aditya Birla Fashion posted a net loss in Q4 owing to lackluster sales growth, higher marketing spends, and the lack of rental rebates (given to retailers by mall owners during Covid). In contrast, Trent clocked a net profit growth of 40% in Q4.
Commenting on the demand trends, Ashish Dikshit, Managing Director at ABFRL, said, “If you recall our earlier conversations, I had said that the lower end of the market was more affected. Now, it looks like a more widespread slowdown.”
Footwear retailers faced a similar challenge of decent sales growth but weaker bottom-line growth. Higher operating costs due to store expansions, marketing expenses, and losses from the newly acquired brand FILA affected the profitability of Metro Brands.
Looking ahead, premium footwear retailer Metro Brands predicts slow near-term sales growth. The management at ABFRL expects a pick-up in consumer sentiment only during the festive season in the second half of the year.
Quick service restaurants: Same-store sales growth cracks, profitability dips
Jubilant Foodworks, a major player in the Quick Service Restaurant (QSR) industry, posted muted revenue growth of 8% this Q4, entirely driven by store additions. The like-for-like growth, which represents growth in existing stores, was negative for Domino's. Devyani International also reported negative same-store sales growth for Pizza Hut.
The profitability of QSR majors suffered deeply due to input cost pressures and negative operating leverage. Negative operating leverage occurs when a company fails to generate enough sales to cover its fixed costs. Quick service restaurants have continued to expand, resulting in higher costs, but sales have not kept up due to weak consumer demand.
Gems and Jewellery: Some sparkle despite challenges
Titan Company saw strong revenue growth in Q4, aided by a low base effect and healthy buyer growth. The Tanishq brand stores clocked SSSG (same store sales growth) of 19%, supported by the rise in gold prices. However, the management noted a period of dull demand between March and mid-April.
Kalyan Jewellers also saw decent top-line growth, helped by store additions in non-south markets. But its mainstay market of south India clocked only 4% revenue growth in Q4.
Jewelry demand picked up during Akshay Tritiya, and remained steady during the wedding season. However, in an interview with Business Today, Ajoy Chawla, CEO of the Jewellery division at Titan, said, “The trend is good. But volatility in demand is high, maybe due to high gold and diamond prices and the reopening of various sectors like travel.”
Demand may take its own sweet time to recover
With retail inflation now declining, consumer-facing companies are anticipating a revival in spending. But the recovery will be a gradual one. Ritesh Tiwari, CFO at Hindustan Unilever, sums this up, “Consumers expect that inflation will be stubborn. This impacts their confidence in spending money, which is why volume growth will be gradual.”
Ashish Goenka, CFO at Jubilant Foodworks, echoes similar sentiments, saying, “This cyclical demand takes 2 to 3 quarters to come back. And I think it's anybody's guess at this moment as to when we will start seeing a full recovery”.
Overall, the C-Suite expect a resurgence in demand in H2FY24 and rare hopeful that the current challenges are temporary. India's economic recovery, they believe, just needs some time to reach their consumers.
Screener: Consumer companies which outperformed their sectors in a difficult quarter
In this week’s edition, we take a look at consumer discretionary stocks that have performed well despite the sluggish demand trends we discussed above. This screener features stocks that have outperformed their respective sectors in terms of net profit and revenue growth in Q4, as well as price changes in the past quarter.
Major stocks in the screener are Titan, Tata Motors, Trent, Indian Hotels, Godrej Properties, Cera Sanitaryware, BLS International Services and Amber Enterprises.
Indian Hotels achieved the highest revenue growth of 86.4% YoY for Q4FY23, outperforming the hotels and tourism sector by over 45 percentage points. The company’s revenue per available room of Rs 8,000 was 70% higher than the industry average. It also outperformed the sector returns by nearly 5 percentage points in the same period.
Trent’s consolidated revenue for Q4FY23 jumped by over 60% YoY, outperforming the retail sector by 39 percentage points. This growth was backed by the stellar growth of the Zudio format. The company also outperformed its sector returns by over 15 percentage points in the past quarter.
Tata Motors’ revenue jumped 35% YoY in Q4FY23, surpassing the growth of the automobile sector by nearly 12 percentage points. It also exceeded the sector’s net profit growth, aided by a strong product mix and comparatively lower product prices.
You can find some popular screenershere.
Signing off this week,
The Trendlyne Team
