Rural stress: Consumer sector Q2 results below expectation

Most companies highlighted decelerating macro resulting in weak consumer sentiments. However, many of them are hopeful on demand revival in the next one quarter owing to the better monsoon, recent policy measures resulting in rural income growth and fast approaching winter season" Centrum said.

Mumbai:Most consumer companies such as Dabur, Britannia and Hindustan Unilever highlighted weak consumer sentiments owing to poor growth in rural areas, a recent report said on Wednesday.

The performance of consumer sector companies are often considered a proxy for rural sector's health. The Centrum report said the consumer sector's Q2FY20 results commentary was a mixed bag and below expectations.

"Most companies highlighted decelerating macro resulting in weak consumer sentiments. However, many of them are hopeful on demand revival in the next one quarter owing to the better monsoon, recent policy measures resulting in rural income growth and fast approaching winter season. The narrative revolved around starkly weaker growth in the rural sector," Centrum said.

The reports said the consumer companies, attributed weak revenues to channel liquidity issues and rural stress forcing them to extend credit lines to key channel partners. Except for Colgate, all have reported higher EBITDA margins YoY. The net profit grew faster owing to the reduced corporate tax rate.

"Nonetheless, the consumption story spins about a weak macro, focus on the rural distribution network and sticking to core categories in gaining market share could be the winning strategy for companies. Our top picks are APNT, Britannia, Dabur and Bajaj Cons," the report noted.

However, the report also said that: "We believe the concerns on demand deceleration are overblown. The recent stimulus by the government and focus on increasing capital spending could lift consumer sentiment in our view. Moreover, better monsoon and policy measures are taken by the govt. could lift farm income".

Companies reviewed by Centrum included Asian Paints, Bajaj Consumer, Britannia, Colgate-Palmolive, Dabur and Hindustan Unilever reported revenue, Earnings before interest, tax, depreciation and amortization (EBITDA), a measure of a company's operating performance,. and Profit after Tax (PAT) growth of 6.8 per cent, 14.6 per cent and 29.8 per cent , respectively.