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Informist, Tuesday, Nov. 26, 2024

 

--Emkay Global's Sen: Slowdown in premium consumption temporary

--CONTEXT: Emkay Global research head Seshadri Sen in interview to Informist

--Emkay Global's Sen: Premium consumption at the beginning of slowdown

--Emkay Global's Sen: Premium consumption will pick up, difficult to say when

--Emkay Global's Sen: Mass consumption to improve once construction picks up

--Emkay Global's Sen: Consumption pattern changes may be affecting listed cos

--Emkay Global's Sen: Price hikes by listed FMCG cos likely affecting growth

--Emkay Global's Sen: Festival season demand decent so far, not roaring

--Emkay Global's Sen: Bullish on industrials as government capex to pick up

--Emkay Global's Sen: Valuations to remain high on consistency in earnings

--Emkay Global's Sen: Earnings cuts by most of the Street have been savage

 

By Anshul Choudhary and Anand J.C.

 

MUMBAI – The slowdown in premium consumption, which led to poor earnings in the September quarter for several consumer companies, is a temporary setback and the demand is likely to improve soon, Seshadri Sen, head of research and strategist at Emkay Global Financial Services, said. While he was hopeful of improvement in mass consumption as well, he acknowledged that changing consumption patterns and the negative effect of price hikes by listed players have made it difficult to assess the exact timeline of recovery in this segment.

 

Sen said growth in premium consumption is likely to be a challenge this financial year due to a high base from last year, the negative effects of low hiring in the second half of 2023-24 (Apr-Mar), and the restrictions imposed by the Reserve Bank of India on unsecured retail lending. While market participants had expected the festival season to provide some respite from slowing demand, Sen said the festivals so far have not given confidence that the slowdown in premium consumption will reverse immediately. 

 

"Our channel checks don't reveal or suggest that this has been a roaring festive season. The most optimistic comment I get is it has been a decent festive season...there is definitely a challenge for consumption," Sen said, who oversees coverage of 175 companies.

 

Sen said premium consumption in India is at the beginning of a slowdown after a strong growth post COVID-19 and any timeline of recovery is difficult to predict. "Whether it is one quarter or three quarters or five quarters...it is too early to tell," Sen said.

 

Having said that, he is optimistic about premium consumption in the long term as he does not see any major fundamental issues. Things are likely to be better once the effect of tighter norms on retail lending normalises and as the job market improves further, he said. "...the RBI will not tighten lending for excessive periods of time," he said.

 

Apart from premium consumption, Sen was also positive on mass consumption despite disappointments in the September quarter earnings. He is optimistic about mass consumption as he has not seen instances of mass distress at the rural level yet. He even argued that demand in this space may have risen recently but listed players have not benefitted either due to price increases or changing consumption patterns.

 

"You look at the FMCG companies...personal care and household products did not do that badly on volume growth (in Jul-Sept), but food has done very badly. Is there something with the food industry itself...is there greater awareness of packaged food," Sen mused. 

 

He sees some positive triggers for rural demand ahead once construction picks up in India, which will help increase income. Further, several states over the last 1-1.5 years have increased welfare spending, which should bode well for rural demand, he said. Considering this, Sen said a recovery in mass consumption is likely, but this may take two years. 

 

While there are still some unanswered questions on consumption, Sen was confident that industrials will give good returns on expectation that the government will increase capital expenditure in the second half of this financial year, which was on pause due to the election and the heavy monsoon. He was also positive on information technology companies, which were amongst the few sectors that reported good earnings in the September quarter.

 

Commenting on the recent market correction, Sen said the slowdown in earnings growth was the major reason behind the fall. He pointed out there have been major downgrades after the September quarter earnings across the board, including large-, mid-, and small-caps. "At a granular level...the earnings cuts have been savage by most of the Street," Sen said, while mentioning even he has approved earnings cuts of 15-20% for some of the companies under coverage during the latest results season.

 

Sen considers the slowdown in domestic earnings to be the biggest reason behind the recent fall in equities. He said expensive valuations was the second-biggest reason for the correction, followed by high interest rates in the US, and expectations of an economic stimulus by China.

 

Considering the effect of slowdown in earnings and slower capital expenditure by the government, the brokerage over the weekend cut its target for the Nifty 50 to 25000 points, which it expects it to reach by December 2025. Tuesday, the Nifty 50 closed at 24,194.50 points, down 0.1% over Monday and still down nearly 8% from its lifetime high touched on Sept. 27.

 

While the brokerage expects muted returns over a year, Sen said it was unlikely the valuations of the Indian market will come down significantly from here. "India is a growth market and you are not going to get it very cheap...it is close to being as attractive as it will get," he said.

 

He expects valuations to remain high, considering Indian corporates have managed to show consistency in their earnings growth. Further, the strong balance sheet of the country and the government's effort towards bringing down the fiscal deficit will bode well for the economy and make sure high valuations stay, he said.

 

"Corporate balance sheets and bank balance sheets are in better shape. The banking system of India is in more robust shape than I have seen in the past 30 years," he said. "The only worry is that we may have over-corrected it."

 

Sen is of the view that the RBI should reduce regulations, which would help banks and other non-banking financial services grow. He said the RBI's crackdown on lending came despite the situation not being at alarming levels, and even wondered if these were aggressive. "In the long term, it may be an acceptable price to pay for the sake of macro-financial stability," he said.  End

 

Edited by Deepshikha Bhardwaj

 

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