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India Consumer
Inflation - Key Headwind for
Consumption in India
Investment conclusion: Rising inflation, heightened
competitive pressures and potential slowdown in
revenue growth have been key themes that continue to
drive our below consensus earnings estimates across
Indian HPC companies. Based on evidence from prior
inflation cycles, our proprietary AlphaWise survey and
insights from our regional macro teams we maintain our
cautious industry view. We prefer stocks with product
categories linked to disposable income growth –we are
OW on ITC, Nestle, United Spirits, Dabur and Cox &
Kings and await a better entry opportunity in GCPL (EW)
What's new: Our Macro team expects inflation to
remain high in 2011. This concern is also being echoed
by consumers through evidence from our proprietary
AlphaWise survey results with over 80% of the
respondents expecting prices to increase over the next
six months. Consumer sentiment in India appears strong
yet if inflation sustains, consumer adjustment thereon
will likely constraint consumption growth, we believe.
Market expectations on the other hand are anchored on
rapid falls in input costs and consequent flat to rising
margins for F12 – assumptions we find aggressive in the
current inflation scenario amidst limited pricing power
and intense competition.
Key Takeaways from our AlphaWise survey results:
1) More consumers are trading up in India across all
product categories vs other Asian countries. 2)
Premiumisation trend is most stark in alcohol and HPC
categories. 3) Among those that have decreased their
household spending, reducing/deferring consumption
are popular choices. 4) Sustained inflation may drive
downtrading in HPC and packaged goods. 5)
Respondents would rather reduce their alcohol
consumption than trade down to less expensive brands.
How do the stocks perform: We identify five periods of
rising inflation over the past decade. Contrary to market
perception, we observe that home growth FMCG
companies in aggregate perform better than large
multinationals during these periods.
Core Questions for Evidence Research
How aware are consumers of rising prices in India?
How has this affected their purchasing behavior?
Do consumers expect prices to continue to rise?
How will consumer purchasing behavior across India evolve over the next 12 months in relation to consumer
staples and discretionary spending on categories such as alcohol, packaged goods and HPC?
The Evidence
Consumers in India are aware of price rises in the last six months
Key Statistic: 85% believe that prices have risen across most categories. The most affected by noticeable price
increases are fresh meat and staples, followed by packaged goods and personal care products. Increases in
appliances, apparel and alcohol have been less visible.
Despite rising prices, consumers have been trading up to more premium brands
Key Statistic: In particular, consumers have been trading up in alcohol (41% attribute increased spend to their
trading up), HPC (43% trading up), and apparel (38% trading up).
Further price increases are expected in most categories
Key Statistic: 75% of respondents expect price inflation of 6% or more across categories over the next six
months. Higher number of respondents expect prices to increase 6% or more in fresh meat (60%) and HPC
(58%), followed by packaged goods (55%) and alcohol (55%).
Consumers are likely to change their behavior in response to noticeable price changes
Key Statistic: A combination of trading down (42%), reducing consumption (34%), bargain hunting (31%) or
deferring purchase (27%) are the most likely tactics consumers will employ to meet the rising prices of goods
overall.
Key Statistic: Specifically, reducing consumption will be most prevalent for Alcohol (70%) and packaged goods
(46%) while consumers intend to meet rising prices in HPC by trading down (62%) to cheaper alternatives.
Optimistic outlook
Key Statistic: Even though 69% of consumers are worried about rising prices, the majority have also been
experiencing wage increases (82%) and expect to see more increases coming (81%) – indicating no expected
loss in purchasing power.
What Gives Us Confidence
We surveyed 5,270 consumers across urban cities in Mainland China, India, Indonesia, Japan, Korea and Taiwan
during February and March, 2011. Please note that fieldwork in Japan closed on March 17th, prior to the first March
earthquake.
The sample is representative of each country’s online adult population in terms of age, gender, and income. Online
populations tend to be skewed to higher income, better educated, urban dwellers and the younger population.
Conclusions based on the total sample have a maximum margin of error of +/-3.2% at 90.0% confidence level.
India Consumer: Inflation Impact on Operating Margins and Earnings
Inflation is Key Macro Risk
According to our Morgan Stanley India economist, Chetan Ahya,
inflation is likely to remain high in 2011driven by delays in policy
exit and supply side pressures.
85% of respondents across product categories in our proprietary
AlphaWise survey believe there has been an increase in prices
across categories, with over half believing product prices have
risen by more than 10% in the past six months
Over half of these respondents have been spending more across
categories – consumer sentiment in India appears fairly strong
yet if inflation is sustained, consumer adjustment thereon will
likely constrain consumption growth, we believe.
Margins Will Continue to be Under Pressure
Over the past 16 quarters, aggregate operating margins for
Indian consumer stocks have exhibited strong negative
correlation with the WPI inflation index.
Market expectation is anchored on rapid fall in input costs and
consequent higher margins for F12 – assumptions we find
aggressive in the current inflation scenario amidst limited pricing
power and intense competition.
Rising inflation, heightened competition and potential slowdown
in revenue growth have been key themes that continue to drive
our below consensus earnings estimates across Indian HPC
stocks.
Strong Consumer Sentiment in India – Sustained Inflation is a Key Macro Risk
Percentage of Respondents Indicating Increase in Spending is Due to “Buying More Expensive Brands”
– India Leads the Region Across All Categories
Current Thesis:
Higher disposable income, favourable demographics and a burgeoning middle class will drive strong demand growth in
consumption categories linked to disposable income growth (alcohol, travel & tourism, niche HPC categories). AlphaWise
evidence below reflects strong premiumisation trends panning out in India vs. other Asian countries.
Key Insights from the Survey:
Respondents from India show a higher level of trade up spending across all product categories compared with other countries.
Trading up is especially stark in alcoholic beverages and HPC categories.
~38% of respondents feel they’re spending more on alcohol and ~37% on HPC as a result of buying more expensive brands.
Among respondents who have already reduced spending in the last six months, reducing/deferring consumption is more popular
than down trading across product categories.
However, if prices continue to rise further, respondents may trade down in case of HPC and packaged goods.
Elasticity of demand is highest for alcoholic beverages – 70% of alcohol consumers plan to reduce consumption if prices rise
further.
Alcohol: Inflation Impact on Consumer Spending … Positive Surprise
Both Volumes and Premiumisation Driving Demand
81% of respondents believe prices of alcoholic beverages have
increased over past six months. Despite this, ~40% of
respondents have increased their outlay on alcoholic
beverages.
Of these respondents, 88% state their spend has increased
driven by either buying more expensive brands or buying more
products in the category.
88% of Respondents cited Buying More Expensive Brands &
Buying More Products as reasons for increased spending
70% of Respondents Might Reduce Consumption with Further
Inflation, while 31% Believe it will have No Impact
Further Inflation may Impact Consumption Demand, but
Downtrading is a Less Popular Choice among Indian
Consumers
55% of total respondents expect alcohol prices to increase 6%
or more over the next six months.
Alcohol demand seems to be relatively elastic, with 70% of
respondents expecting to reduce consumption in response to
further price inflation. In our view, this response seems
exaggerated – price increases are absorbed relatively well in
this category (as in tobacco).
Interestingly, only 27% of respondents might opt to trade down
to less expensive brands.
\
Packaged Goods: Inflation Impact on Consumer Spending … LT Intact, ST Pressures
Sustained Inflation Poses Risk to Volume-led Demand
84% of respondents believe prices of packaged goods
have increased over the past six months
Yet 58% of respondents have increased their spending
on packaged goods, driven largely by volume increases.
Of those that have reduced their spend on the category,
over half are buying fewer products or deferring their
purchases.
~53% of Respondents Increased Spending as a Result
of Buying More Products
Downtrading is a Popular Response to Further Inflation in
Packaged Goods
Sustained Inflation may drive Downtrading in Packaged Foods in
India
55% of respondents expect packaged goods prices to increase 6% or
more over the next six months
Demand for packaged goods is price elastic, with 46% of respondents
expecting to reduce consumption in response to further price inflation.
Consumers are also willing to trade down to less expensive brands; in
fact that is the most popular means among survey respondents to
control spending in this category.
Packaged foods in India has the potential to grow 970bp ahead of disposable income. In the near term however, inflationary
pressures may constrict consumer willingness to pay a premium for convenience and hygiene. Our Pick – Nestle. With strong brands,
great consumer insight and a capable management team, Nestlé is well placed to capitalize on long term growth potential.
HPC: Inflation Impact on Consumer Spending … Price Elasticity Higher
Both Volumes and Premiumisation Driving Demand
58% of respondents across income bands have increased their
spending on HPC products.
Of these respondents, 82% state their spend has increased
driven by either buying more expensive brands or buying more
products in the category.
Of those respondents who have reduced their spend on the
category, 60% are buying fewer products or deferring their
purchases, while an additional 20% are downtrading.
~82% of Respondents Increased Alcohol Spending due to
Buying More Expensive Brands and Buying More Products
Across Product Categories, HPC seems Most Susceptible to
Further inflation
Sustained Inflation may Drive Downtrading in HPC
Categories in India
58% of respondents expect HPC product prices to increase
6% or more over the next six months.
HPC seems most elastic to further inflation – the least
number of respondents across product categories believe
their spending won’t be impacted by price inflation.
Over 60% of consumers are planning to trade down to
cheaper products / stores, while over half of the consumers
plan to defer / reduce consumption.
Near Term Pressures from Inflation and Competition. Although the entire HPC category has the potential to grow rapidly in India,
emerging categories and aspirational products such as deodorants, premium skin care, and color cosmetics may grow faster. A few
mature categories such as soaps and laundry may grow much slower. Stocks in Focus – HUL, GCPL, Marico, Colgate
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Consumer
Inflation - Key Headwind for
Consumption in India
Investment conclusion: Rising inflation, heightened
competitive pressures and potential slowdown in
revenue growth have been key themes that continue to
drive our below consensus earnings estimates across
Indian HPC companies. Based on evidence from prior
inflation cycles, our proprietary AlphaWise survey and
insights from our regional macro teams we maintain our
cautious industry view. We prefer stocks with product
categories linked to disposable income growth –we are
OW on ITC, Nestle, United Spirits, Dabur and Cox &
Kings and await a better entry opportunity in GCPL (EW)
What's new: Our Macro team expects inflation to
remain high in 2011. This concern is also being echoed
by consumers through evidence from our proprietary
AlphaWise survey results with over 80% of the
respondents expecting prices to increase over the next
six months. Consumer sentiment in India appears strong
yet if inflation sustains, consumer adjustment thereon
will likely constraint consumption growth, we believe.
Market expectations on the other hand are anchored on
rapid falls in input costs and consequent flat to rising
margins for F12 – assumptions we find aggressive in the
current inflation scenario amidst limited pricing power
and intense competition.
Key Takeaways from our AlphaWise survey results:
1) More consumers are trading up in India across all
product categories vs other Asian countries. 2)
Premiumisation trend is most stark in alcohol and HPC
categories. 3) Among those that have decreased their
household spending, reducing/deferring consumption
are popular choices. 4) Sustained inflation may drive
downtrading in HPC and packaged goods. 5)
Respondents would rather reduce their alcohol
consumption than trade down to less expensive brands.
How do the stocks perform: We identify five periods of
rising inflation over the past decade. Contrary to market
perception, we observe that home growth FMCG
companies in aggregate perform better than large
multinationals during these periods.
Core Questions for Evidence Research
How aware are consumers of rising prices in India?
How has this affected their purchasing behavior?
Do consumers expect prices to continue to rise?
How will consumer purchasing behavior across India evolve over the next 12 months in relation to consumer
staples and discretionary spending on categories such as alcohol, packaged goods and HPC?
The Evidence
Consumers in India are aware of price rises in the last six months
Key Statistic: 85% believe that prices have risen across most categories. The most affected by noticeable price
increases are fresh meat and staples, followed by packaged goods and personal care products. Increases in
appliances, apparel and alcohol have been less visible.
Despite rising prices, consumers have been trading up to more premium brands
Key Statistic: In particular, consumers have been trading up in alcohol (41% attribute increased spend to their
trading up), HPC (43% trading up), and apparel (38% trading up).
Further price increases are expected in most categories
Key Statistic: 75% of respondents expect price inflation of 6% or more across categories over the next six
months. Higher number of respondents expect prices to increase 6% or more in fresh meat (60%) and HPC
(58%), followed by packaged goods (55%) and alcohol (55%).
Consumers are likely to change their behavior in response to noticeable price changes
Key Statistic: A combination of trading down (42%), reducing consumption (34%), bargain hunting (31%) or
deferring purchase (27%) are the most likely tactics consumers will employ to meet the rising prices of goods
overall.
Key Statistic: Specifically, reducing consumption will be most prevalent for Alcohol (70%) and packaged goods
(46%) while consumers intend to meet rising prices in HPC by trading down (62%) to cheaper alternatives.
Optimistic outlook
Key Statistic: Even though 69% of consumers are worried about rising prices, the majority have also been
experiencing wage increases (82%) and expect to see more increases coming (81%) – indicating no expected
loss in purchasing power.
What Gives Us Confidence
We surveyed 5,270 consumers across urban cities in Mainland China, India, Indonesia, Japan, Korea and Taiwan
during February and March, 2011. Please note that fieldwork in Japan closed on March 17th, prior to the first March
earthquake.
The sample is representative of each country’s online adult population in terms of age, gender, and income. Online
populations tend to be skewed to higher income, better educated, urban dwellers and the younger population.
Conclusions based on the total sample have a maximum margin of error of +/-3.2% at 90.0% confidence level.
India Consumer: Inflation Impact on Operating Margins and Earnings
Inflation is Key Macro Risk
According to our Morgan Stanley India economist, Chetan Ahya,
inflation is likely to remain high in 2011driven by delays in policy
exit and supply side pressures.
85% of respondents across product categories in our proprietary
AlphaWise survey believe there has been an increase in prices
across categories, with over half believing product prices have
risen by more than 10% in the past six months
Over half of these respondents have been spending more across
categories – consumer sentiment in India appears fairly strong
yet if inflation is sustained, consumer adjustment thereon will
likely constrain consumption growth, we believe.
Margins Will Continue to be Under Pressure
Over the past 16 quarters, aggregate operating margins for
Indian consumer stocks have exhibited strong negative
correlation with the WPI inflation index.
Market expectation is anchored on rapid fall in input costs and
consequent higher margins for F12 – assumptions we find
aggressive in the current inflation scenario amidst limited pricing
power and intense competition.
Rising inflation, heightened competition and potential slowdown
in revenue growth have been key themes that continue to drive
our below consensus earnings estimates across Indian HPC
stocks.
Strong Consumer Sentiment in India – Sustained Inflation is a Key Macro Risk
Percentage of Respondents Indicating Increase in Spending is Due to “Buying More Expensive Brands”
– India Leads the Region Across All Categories
Current Thesis:
Higher disposable income, favourable demographics and a burgeoning middle class will drive strong demand growth in
consumption categories linked to disposable income growth (alcohol, travel & tourism, niche HPC categories). AlphaWise
evidence below reflects strong premiumisation trends panning out in India vs. other Asian countries.
Key Insights from the Survey:
Respondents from India show a higher level of trade up spending across all product categories compared with other countries.
Trading up is especially stark in alcoholic beverages and HPC categories.
~38% of respondents feel they’re spending more on alcohol and ~37% on HPC as a result of buying more expensive brands.
Among respondents who have already reduced spending in the last six months, reducing/deferring consumption is more popular
than down trading across product categories.
However, if prices continue to rise further, respondents may trade down in case of HPC and packaged goods.
Elasticity of demand is highest for alcoholic beverages – 70% of alcohol consumers plan to reduce consumption if prices rise
further.
Alcohol: Inflation Impact on Consumer Spending … Positive Surprise
Both Volumes and Premiumisation Driving Demand
81% of respondents believe prices of alcoholic beverages have
increased over past six months. Despite this, ~40% of
respondents have increased their outlay on alcoholic
beverages.
Of these respondents, 88% state their spend has increased
driven by either buying more expensive brands or buying more
products in the category.
88% of Respondents cited Buying More Expensive Brands &
Buying More Products as reasons for increased spending
70% of Respondents Might Reduce Consumption with Further
Inflation, while 31% Believe it will have No Impact
Further Inflation may Impact Consumption Demand, but
Downtrading is a Less Popular Choice among Indian
Consumers
55% of total respondents expect alcohol prices to increase 6%
or more over the next six months.
Alcohol demand seems to be relatively elastic, with 70% of
respondents expecting to reduce consumption in response to
further price inflation. In our view, this response seems
exaggerated – price increases are absorbed relatively well in
this category (as in tobacco).
Interestingly, only 27% of respondents might opt to trade down
to less expensive brands.
\
Packaged Goods: Inflation Impact on Consumer Spending … LT Intact, ST Pressures
Sustained Inflation Poses Risk to Volume-led Demand
84% of respondents believe prices of packaged goods
have increased over the past six months
Yet 58% of respondents have increased their spending
on packaged goods, driven largely by volume increases.
Of those that have reduced their spend on the category,
over half are buying fewer products or deferring their
purchases.
~53% of Respondents Increased Spending as a Result
of Buying More Products
Downtrading is a Popular Response to Further Inflation in
Packaged Goods
Sustained Inflation may drive Downtrading in Packaged Foods in
India
55% of respondents expect packaged goods prices to increase 6% or
more over the next six months
Demand for packaged goods is price elastic, with 46% of respondents
expecting to reduce consumption in response to further price inflation.
Consumers are also willing to trade down to less expensive brands; in
fact that is the most popular means among survey respondents to
control spending in this category.
Packaged foods in India has the potential to grow 970bp ahead of disposable income. In the near term however, inflationary
pressures may constrict consumer willingness to pay a premium for convenience and hygiene. Our Pick – Nestle. With strong brands,
great consumer insight and a capable management team, Nestlé is well placed to capitalize on long term growth potential.
HPC: Inflation Impact on Consumer Spending … Price Elasticity Higher
Both Volumes and Premiumisation Driving Demand
58% of respondents across income bands have increased their
spending on HPC products.
Of these respondents, 82% state their spend has increased
driven by either buying more expensive brands or buying more
products in the category.
Of those respondents who have reduced their spend on the
category, 60% are buying fewer products or deferring their
purchases, while an additional 20% are downtrading.
~82% of Respondents Increased Alcohol Spending due to
Buying More Expensive Brands and Buying More Products
Across Product Categories, HPC seems Most Susceptible to
Further inflation
Sustained Inflation may Drive Downtrading in HPC
Categories in India
58% of respondents expect HPC product prices to increase
6% or more over the next six months.
HPC seems most elastic to further inflation – the least
number of respondents across product categories believe
their spending won’t be impacted by price inflation.
Over 60% of consumers are planning to trade down to
cheaper products / stores, while over half of the consumers
plan to defer / reduce consumption.
Near Term Pressures from Inflation and Competition. Although the entire HPC category has the potential to grow rapidly in India,
emerging categories and aspirational products such as deodorants, premium skin care, and color cosmetics may grow faster. A few
mature categories such as soaps and laundry may grow much slower. Stocks in Focus – HUL, GCPL, Marico, Colgate
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