What is the central story emerging from earnings season?  

With the earning season just behind, it may be a good time to look at the macro picture that emerges from the micro earnings. Conference calls and management commentaries throw up a lot of insights into how outlook is shaping up for various sub-sectors. In this context, it is fascinating to reflect on the sense one is getting from such insights with respect to how demand is shaping up, esp.  in the consumption space. With a lion’s share of over 60% in the GDP, consumption is a critical space for a deep dive. Over there, the picture looks patchy and the underlying signals throw up distress in distinct spots.  The central story of the earning season, if there is one, it is the emerging divergence between luxury and mass segment. In a way it is a K story for the economy where the top end is shining while the inflationary burden on the bottom end is playing havoc with the mass market demand. It is not without reason that the social media is all buzz with funny memes on the divergent demand trends between underwear/chappals and luxury cars. In a way, it reflects the grim reality of K-shaped recovery India is facing now. As the theory goes, whenever people are tight on money, they don’t replace their underwear. Signals from underwear can only be ignored at one’s own peril.

The best place to start for the deep dive, is to look at the data points from the FMCG sector. How does the volume picture look like for this sector for the quarter gone by? As per NielsenIQ, the industry’s value growth of over 7% in the Oct-Dec quarter came more from price hikes than underlying volume growth. While the urban volumes managed to eke out marginal volume growth i.e.1.6%, rural segment saw a volume decline of 2.8%. Similarly, management commentaries from both Asian paints and Pidilite flagged stress in rural and semi-urban demand. Both these companies reported a flattish volume growth for the last quarter. The commentaries from hair-oil companies like Marico, Dabur or Bajaj Consumer are no different. They all sing the same tunes of rural and semi-urban stress. The picture is no different in other mass product segments like low priced footwear or entry-level motorbikes and so on. It may be pertinent here to note that the entry-level two wheelers are still down by over 35% from pre-pandemic volumes.

While mass segment is on a murky shape, on the other side, at the top end, picture couldn’t be more contrasting. Take the case of luxury cars. Sold out signs are there for everyone to see. It is hard not to miss the optimism from the management on premium cars. High double digit volume growth from Ethos, a luxury watch retailer is no coincidence. Same is the case with premium footwear or sportswear from companies like Campus Activewear or Metro Brands, contrasting the crashing demand for mass market retailers like Bata or Khadim. Though some of the volume pressures on the mass market are on account of high base effect in this quarter (lumped-up demand in the base quarter because of pent-up demand post covid opening in Oct-Dec’21), the K-shaped divergence is still distinct in the overall demand landscape.

Recovery in rural and semi-urban demand is critical if the shape of the recovery has to change from K to V. Though management commentaries are pointing to early signs of rural recovery, it may be too early to celebrate. Given the climatic heat effect on the Rabi crop yield and the possibility of a negative impact on monsoon from a probable El Nino phenomenon later this year, one needs to keep fingers crossed on sustainable rural recovery.

Will the delay in rural recovery derail the growth prospects for the economy? Will the 6.5% growth projections by RBI and IMF for the economy get scuttled by the continued stress in the sub-urban and rural segment? We will not have those answers any time soon. But that doesn’t stop us from looking at other shining spots of the economy. While consumption is going through the K-type divergence, prospects for infra and investment demand offer hope. One is witnessing stronger traction in those segments, thanks primarily to the initial signs of turns in the private capex and from the stronger push from the Govt on the public capex. The case in point is the increased allocation from Govt to the capex spending. It is at all-time high of 3.3% of the GDP for the FY23-24 as per budget projections. With divergent signals coming from different segments of the economy, money managers are not going to have it easy. When it comes to portfolio positioning, one can rationalize the portfolio to gain from the increased spending in capex allocation and restructure if required to adjust for the headwinds in the rural consumption side. Interesting times for portfolio and money managers!

This article of mine was published in the online edition of Economic Times (05/03/2023). Glad to share the link:https://economictimes.indiatimes.com/markets/stocks/news/what-is-the-central-story-emerging-from-earnings-season/articleshow/98429610.cms


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