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Executive Summary
Amidst cacophony of the slowdown, we set out for an on‐the‐ground survey to gauge
consumer sentiments. We criss‐crossed India, covering over 40 cities and calling on more
than 100 industry participants/project sites to assess the real demand scenario during and
after the festival season. The survey explored FMCG, automobile, white goods, brown goods,
tour and travel business, real estate, media and home solutions.
From the exhaustive assessment, we observe the following: (1) there is in general slowdown
in demand for consumer discretionary items and real estate, (2) the slowdown is more
pronounced in urban centres even though rural India is still growing albeit at a slower pace,
(3) exceptions to the slowdown have been FMCG and air travel industry and (4) the pricing
power of manufacturers is weakening since past price hikes have aggravated the demand
slowdown.
In our view, Q3 earnings are likely to reflect the overall weakness. Waning industry discipline
could be a risk to margins which may play out if the slowdown prolongs.
By and large, demand in rural India is better than urban areas though the growth has
certainly moderated. Exceptions are areas where crop realization has been poor. Hence, the
progress of key winter crops, namely wheat, lentil and mustard, becomes a key monitorable
to take a view on rural demand in FY13. We would conduct a follow‐on survey on rural
demand in March closer to the harvesting season
Our ground survey reveals a broader slowdown across categories during
and after the festival season. The slowdown is more pronounced in the
consumer discretionary segment as well as in urban centers. Rural sales
are still growing albeit at a slower pace. Consumer staple and domestic
travelling are still defying the trend. Price hikes have aggravated the
slowdown in sales which also hints at the waning pricing power. These
trends are likely to reflect in Q3 earnings and should accentuate in
subsequent quarters. Thus, these pose downside risks to both sales and
margins. We covered over 40 cities and visited over 100 industry
participants/project sites across India. The survey dealt with FMCG,
automobile, white goods, brown goods, tour & travel, real estate, media
and home solutions.
Sharper decline post festive season; FMCG, air travel resist trends
Demand during the festival season has been disappointing across categories for
consumer discretionary. However, the fall in demand is far more acute post the festival
season in December, implying a significant deterioration in consumer sentiments.
Inventories have been high for cars, two wheelers, brown goods and luggage segments.
Real estate has seen poor offtake during the festival season in key cities like Delhi NCR,
Mumbai and Bengaluru. Exceptions have been FMCG and domestic travel which
continue to grow. Air travel has gained primarily due to capacity constraints with
railways and not so high festival season fares.
Rural growth moderates; winter crop decisive for demand in FY13
In rural areas, demand is still growing albeit at a slower pace even though down‐trading
is still not visible in the FMCG sector. Growth in rural FMCG sales has slowed down by a
couple of percentage points though it is still in high teens. However, the impact of the
economic slowdown comes with a lag to consumer staples within which, soaps and
detergents would be the most vulnerable. Rural demand for two wheelers and cars has
halved, though it is still growing in high single digits. In our view, these are early signs of
the slowdown even as progress of the winter crop would be a deciding factor for rural
demand in FY13.
Pricing power weakening, slowdown may rupture price discipline
Frequent price hikes in mobile handsets and luggage have been cited as the key reason
for demand slowdown, signifying that pricing power may be waning. Discounts have
also gone up in general, though industries have shown utmost discipline in pricing. This
may change if the slowdown protracts, posing a risk to margins.
Q3 earnings to reflect slowdown in sales
Our survey suggests that two wheelers, cars, white goods, brown goods, luggage, retail,
mobile handset, paints and watches etc., should post a sales slowdown in Q3 results.
Automobiles
Our interaction with car and two‐wheeler dealers in over 30 cities across India reveals that in
general, retail sales are down YoY. For cars, urban sales are down 10‐15% while for
motorcycles it is flat. In rural India, the growth rate has halved, yet it is still in high single
digits. Central and some parts of western India are growing whilst North and South are facing
the slowdown.
Discounts, already high in cars, have started to surface in two wheelers, though these are
mostly from dealers. Inventory level has crossed four weeks for two wheelers while for cars,
it has eased due to production adjustments from OEMs. Aggressive sales push from twowheeler
OEMs has begun in the form of a liberal extension of credit to dealers while the good
news is that banks are still willing to lend, albeit at a higher interest rate.
Brown Goods
We recently met/ interacted with several distributors/ dealers across the country to gauge
demand for appliances (brown goods) during the festive season and thereafter. Based on our
channel checks, we gather that festival demand has been broadly similar to last year, thus
indicating flattish sales volume growth across all regions with the only exception being North
Eastern region and Kerala. November was significantly slower, declining ~10‐15% while
December saw slower appliances sales even as seasonal products’ volume surged ~15‐20%.
Most distributors / dealers expect slower pick up in demand during the next few months.
Consumer Goods
Our interactions with dealers and distributors suggest that most non‐discretionary Consumer
Goods segment (FMCG) is not witnessing any significant growth slowdown in Q3FY12. Rural
demand continues to grow faster compared to urban India. However, a slowdown in the
discretionary segment is visible with consumers delaying their purchases and also slowing
down premiumisation. For FMCG, the new packaging legislation norm could potentially
impact demand in FY13, more so for unorganized players.
Media
Our interactions with dealers and distributors suggest that the DTH industry is witnessing
moderate signs of slowdown. Major reasons attributed by dealers include hike in set top box
prices, slowdown in TV sales, reduced promotions, lower trade margins and rising prices of
basic channel packages. However, a likely silver lining could be incremental subscriber
additions in February and March in Q4FY12 due to the digitization mandate. Multiplex
occupancy levels, which are seemingly dependent on success of movies rather than the state
of the economy, have been stable due to decent movie releases.
Mobile Handsets
Our interaction with handset distributors indicates that there is a slowdown in handset sales.
During the festival season sales were apparently down 15‐20% YoY. The primary reasons for
the slowdown are INR depreciation of 20% and tariff hikes by telecom operators. As most
handsets are imported, due to the INR depreciation, handset manufacturers have increased
prices by about 10%, thereby hurting demand. Also, the tariff hikes of about 20% by telecom
operators and their focus on profitability has led to lower new subscriber additions. As
manufacturers have reduced distributor commissions, anecdotally, we learnt that some
distributors have shifted trades and moved to some other business. Smartphone sales,
though, have risen by about 25‐30% due to cheaper handsets, launch of 3G services and
upscaling by customers.
Real Estate
Our interaction with a number of brokers, home loan intermediaries and home buyers across
three metros of Mumbai, NCR and Bengaluru reveals that housing demand in the current
festival season has seen a slowdown in volumes across the board. Mumbai has continued to
remain the damp squib due to high prices and weak launches while buyers in Bengaluru are
delaying purchase decisions on back of global uncertainties and high interest rates. NCR
volumes have declined as new launches have slowed down and sellers (in secondary sales
market) are unwilling to sell their booked properties till milestone payments are due. While
developers had offered explicit discounts to lure buyers during the CY08 downturn, this time
around developers have held back their hands and discounts being offered are primarily in
the form of EMI waivers and interest subvention schemes, amounting to 5‐7% effective
discounts.
Luggage
Our channel checks with dealers, MBOs and exclusive outlets across Mumbai, Indore, Delhi,
and Gujarat, suggest that growth in the luggage industry is slowing down not only in tier 1
cities, but in tier 2 and 3 cities as well. While YoY growth in tier 1 cities has slowed down to
10‐15% against 15‐20%, in tier 2 and 3 cities, it has slowed down to 15‐17% against 20%.
Most dealers and stores expect growth to lose pace further MoM with December being much
slow than November. Unlike last year, this year diwali sales too were lower.
Tour & Travels
Our interaction with 10 large tour operators, hotels and airline companies reveals that
domestic leisure business continues to post growth of 15‐20% with corporate business
showing signs of slowdown. Foreign Tourist Arrivals (FTAs) growth is in high single digits (8‐
9%). Current INR depreciation had no positive impact on the business as bookings for
inbound travel were made in H1CY11. Outbound leisure traffic is expected to come under
pressure if currency persists at current levels till February. Air traffic continues to grow at
more than 15% YoY as small towns continue to contribute to overall growth.
High competition has kept ARRs growth at anemic levels of 5‐8%, with occupancy levels of
75% plus. Yield increase of 20% effected by all airlines during November 2011 is still to show
any meaningful impact on demand
White Goods
Our channel checks with dealers, MBOs and large format stores like Croma and Vijay Sales
across Mumbai, Pune, Surat, Indore, Patna, Delhi and Cochin indicate that growth in white
goods industry is slowing down.
Our channel checks in tier 1 cities indicate that there is a decline of 15–20% in refrigerators,
washing machines and air conditioner YoY. However, the decline in microwaves and dish
washers has been of around 5–7% because of the lower base. Also, tier 2 and 3 cities have
slowed down to 0–5% YoY. This year, Diwali sales were lukewarm across products as the
demand scenario has worsened further over November and December. Given that white
goods are discretionary products, high interest rates, higher inflation and unemployment
fears compounded by 8–10% increase in prices resulted in consumers delaying their purchase
decisions.
Our channel checks suggest that large format stores like Vijay Sales and Croma have been
resorting to combo offers and extra 5‐10% discounts across segments (over and above the
minimum discount on MRP) to reduce inventories. We believe the situation is unlikely to
improve over the next few months even though demand for air conditioners may pick up in
Q4FY12, provided favourable weather.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Executive Summary
Amidst cacophony of the slowdown, we set out for an on‐the‐ground survey to gauge
consumer sentiments. We criss‐crossed India, covering over 40 cities and calling on more
than 100 industry participants/project sites to assess the real demand scenario during and
after the festival season. The survey explored FMCG, automobile, white goods, brown goods,
tour and travel business, real estate, media and home solutions.
From the exhaustive assessment, we observe the following: (1) there is in general slowdown
in demand for consumer discretionary items and real estate, (2) the slowdown is more
pronounced in urban centres even though rural India is still growing albeit at a slower pace,
(3) exceptions to the slowdown have been FMCG and air travel industry and (4) the pricing
power of manufacturers is weakening since past price hikes have aggravated the demand
slowdown.
In our view, Q3 earnings are likely to reflect the overall weakness. Waning industry discipline
could be a risk to margins which may play out if the slowdown prolongs.
By and large, demand in rural India is better than urban areas though the growth has
certainly moderated. Exceptions are areas where crop realization has been poor. Hence, the
progress of key winter crops, namely wheat, lentil and mustard, becomes a key monitorable
to take a view on rural demand in FY13. We would conduct a follow‐on survey on rural
demand in March closer to the harvesting season
Our ground survey reveals a broader slowdown across categories during
and after the festival season. The slowdown is more pronounced in the
consumer discretionary segment as well as in urban centers. Rural sales
are still growing albeit at a slower pace. Consumer staple and domestic
travelling are still defying the trend. Price hikes have aggravated the
slowdown in sales which also hints at the waning pricing power. These
trends are likely to reflect in Q3 earnings and should accentuate in
subsequent quarters. Thus, these pose downside risks to both sales and
margins. We covered over 40 cities and visited over 100 industry
participants/project sites across India. The survey dealt with FMCG,
automobile, white goods, brown goods, tour & travel, real estate, media
and home solutions.
Sharper decline post festive season; FMCG, air travel resist trends
Demand during the festival season has been disappointing across categories for
consumer discretionary. However, the fall in demand is far more acute post the festival
season in December, implying a significant deterioration in consumer sentiments.
Inventories have been high for cars, two wheelers, brown goods and luggage segments.
Real estate has seen poor offtake during the festival season in key cities like Delhi NCR,
Mumbai and Bengaluru. Exceptions have been FMCG and domestic travel which
continue to grow. Air travel has gained primarily due to capacity constraints with
railways and not so high festival season fares.
Rural growth moderates; winter crop decisive for demand in FY13
In rural areas, demand is still growing albeit at a slower pace even though down‐trading
is still not visible in the FMCG sector. Growth in rural FMCG sales has slowed down by a
couple of percentage points though it is still in high teens. However, the impact of the
economic slowdown comes with a lag to consumer staples within which, soaps and
detergents would be the most vulnerable. Rural demand for two wheelers and cars has
halved, though it is still growing in high single digits. In our view, these are early signs of
the slowdown even as progress of the winter crop would be a deciding factor for rural
demand in FY13.
Pricing power weakening, slowdown may rupture price discipline
Frequent price hikes in mobile handsets and luggage have been cited as the key reason
for demand slowdown, signifying that pricing power may be waning. Discounts have
also gone up in general, though industries have shown utmost discipline in pricing. This
may change if the slowdown protracts, posing a risk to margins.
Q3 earnings to reflect slowdown in sales
Our survey suggests that two wheelers, cars, white goods, brown goods, luggage, retail,
mobile handset, paints and watches etc., should post a sales slowdown in Q3 results.
Automobiles
Our interaction with car and two‐wheeler dealers in over 30 cities across India reveals that in
general, retail sales are down YoY. For cars, urban sales are down 10‐15% while for
motorcycles it is flat. In rural India, the growth rate has halved, yet it is still in high single
digits. Central and some parts of western India are growing whilst North and South are facing
the slowdown.
Discounts, already high in cars, have started to surface in two wheelers, though these are
mostly from dealers. Inventory level has crossed four weeks for two wheelers while for cars,
it has eased due to production adjustments from OEMs. Aggressive sales push from twowheeler
OEMs has begun in the form of a liberal extension of credit to dealers while the good
news is that banks are still willing to lend, albeit at a higher interest rate.
Brown Goods
We recently met/ interacted with several distributors/ dealers across the country to gauge
demand for appliances (brown goods) during the festive season and thereafter. Based on our
channel checks, we gather that festival demand has been broadly similar to last year, thus
indicating flattish sales volume growth across all regions with the only exception being North
Eastern region and Kerala. November was significantly slower, declining ~10‐15% while
December saw slower appliances sales even as seasonal products’ volume surged ~15‐20%.
Most distributors / dealers expect slower pick up in demand during the next few months.
Consumer Goods
Our interactions with dealers and distributors suggest that most non‐discretionary Consumer
Goods segment (FMCG) is not witnessing any significant growth slowdown in Q3FY12. Rural
demand continues to grow faster compared to urban India. However, a slowdown in the
discretionary segment is visible with consumers delaying their purchases and also slowing
down premiumisation. For FMCG, the new packaging legislation norm could potentially
impact demand in FY13, more so for unorganized players.
Media
Our interactions with dealers and distributors suggest that the DTH industry is witnessing
moderate signs of slowdown. Major reasons attributed by dealers include hike in set top box
prices, slowdown in TV sales, reduced promotions, lower trade margins and rising prices of
basic channel packages. However, a likely silver lining could be incremental subscriber
additions in February and March in Q4FY12 due to the digitization mandate. Multiplex
occupancy levels, which are seemingly dependent on success of movies rather than the state
of the economy, have been stable due to decent movie releases.
Mobile Handsets
Our interaction with handset distributors indicates that there is a slowdown in handset sales.
During the festival season sales were apparently down 15‐20% YoY. The primary reasons for
the slowdown are INR depreciation of 20% and tariff hikes by telecom operators. As most
handsets are imported, due to the INR depreciation, handset manufacturers have increased
prices by about 10%, thereby hurting demand. Also, the tariff hikes of about 20% by telecom
operators and their focus on profitability has led to lower new subscriber additions. As
manufacturers have reduced distributor commissions, anecdotally, we learnt that some
distributors have shifted trades and moved to some other business. Smartphone sales,
though, have risen by about 25‐30% due to cheaper handsets, launch of 3G services and
upscaling by customers.
Real Estate
Our interaction with a number of brokers, home loan intermediaries and home buyers across
three metros of Mumbai, NCR and Bengaluru reveals that housing demand in the current
festival season has seen a slowdown in volumes across the board. Mumbai has continued to
remain the damp squib due to high prices and weak launches while buyers in Bengaluru are
delaying purchase decisions on back of global uncertainties and high interest rates. NCR
volumes have declined as new launches have slowed down and sellers (in secondary sales
market) are unwilling to sell their booked properties till milestone payments are due. While
developers had offered explicit discounts to lure buyers during the CY08 downturn, this time
around developers have held back their hands and discounts being offered are primarily in
the form of EMI waivers and interest subvention schemes, amounting to 5‐7% effective
discounts.
Luggage
Our channel checks with dealers, MBOs and exclusive outlets across Mumbai, Indore, Delhi,
and Gujarat, suggest that growth in the luggage industry is slowing down not only in tier 1
cities, but in tier 2 and 3 cities as well. While YoY growth in tier 1 cities has slowed down to
10‐15% against 15‐20%, in tier 2 and 3 cities, it has slowed down to 15‐17% against 20%.
Most dealers and stores expect growth to lose pace further MoM with December being much
slow than November. Unlike last year, this year diwali sales too were lower.
Tour & Travels
Our interaction with 10 large tour operators, hotels and airline companies reveals that
domestic leisure business continues to post growth of 15‐20% with corporate business
showing signs of slowdown. Foreign Tourist Arrivals (FTAs) growth is in high single digits (8‐
9%). Current INR depreciation had no positive impact on the business as bookings for
inbound travel were made in H1CY11. Outbound leisure traffic is expected to come under
pressure if currency persists at current levels till February. Air traffic continues to grow at
more than 15% YoY as small towns continue to contribute to overall growth.
High competition has kept ARRs growth at anemic levels of 5‐8%, with occupancy levels of
75% plus. Yield increase of 20% effected by all airlines during November 2011 is still to show
any meaningful impact on demand
White Goods
Our channel checks with dealers, MBOs and large format stores like Croma and Vijay Sales
across Mumbai, Pune, Surat, Indore, Patna, Delhi and Cochin indicate that growth in white
goods industry is slowing down.
Our channel checks in tier 1 cities indicate that there is a decline of 15–20% in refrigerators,
washing machines and air conditioner YoY. However, the decline in microwaves and dish
washers has been of around 5–7% because of the lower base. Also, tier 2 and 3 cities have
slowed down to 0–5% YoY. This year, Diwali sales were lukewarm across products as the
demand scenario has worsened further over November and December. Given that white
goods are discretionary products, high interest rates, higher inflation and unemployment
fears compounded by 8–10% increase in prices resulted in consumers delaying their purchase
decisions.
Our channel checks suggest that large format stores like Vijay Sales and Croma have been
resorting to combo offers and extra 5‐10% discounts across segments (over and above the
minimum discount on MRP) to reduce inventories. We believe the situation is unlikely to
improve over the next few months even though demand for air conditioners may pick up in
Q4FY12, provided favourable weather.
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