View on COVID-19 pandemic situation
COVID-19 pandemic is unprecedented situations with little certainty given number of cases are yet to peak out globally. In India, given timely approach of complete lockdown, situation looks still under control. COVID-19 situation is still fluid and difficult to pre-empt normalcy on the wake of no proper vaccination. Tough measure like complete lockdown will take a toll on economic growth, which was already reeling under slowdown owing to liquidity issues. In the aftermath, another round of risk aversion in the system will make it further difficult for relatively smaller businesses with weaker balance sheet to survive and may result in further consolidation.
View on FMCG Sector:
FMCG sector growth was anyway trending down prior to COVID outbreak owing to liquidity issue and weak rural demand and touched as low as ~6% during Oct-Dec’19 period as per Nielsen. It is fair to assume, near term disruption for most of the FMCG companies may be lower given most of the categories (Ex-Beauty Products) falling under essential categories. Though, non-availability of labour and logistic bottlenecks will make it difficult for these companies to operate at full potential. Despite of near term supply chain disruption, impact on earnings in the near to medium term could be moderate given margin cushion owing to lower crude oil prices and curtailing of discretionary spends like advertising & promotions to make up for any shortfall in revenue growth.
In the aftermath, change in consumer preference towards better hygiene might help in growth acceleration in certain product categories like packaged food, personal wash and immunity booster etc. Branded packaged food players might also benefit significantly out of unorganized (loose products) to organized (packaged products) shift.In summary, FMCG sector is relatively well placed to navigate current scenario with decent earnings visibility.
View on consumer discretionary Sector:
Consumer discretionary/Retail sector profitability may see significant dent in the near term given complete lockdown. Most of the retail businesses typically have characteristics of high fixed costs and will be significantly impacted because of negative operating leverage. Consumer durable sector may also be impacted severely due to higher sales during summer months and lockdown during peak season makes it that much more difficult to cover up lost sales during rest of the year. Overall, a large portion of one year earnings (FY21) could be lost for certain discretionary businesses.
In the aftermath, demand scenario for discretionary categories might not look upbeat given impact on people’s earnings in case of job losses and salary cuts. On the other hand in case if things don’tworsen, demand revival could be quick supported by low interest rate and any significant Govt stimulus. Companies with better balance sheet would be able to navigate this crisis well and also should be key beneficiary of the sector consolidation. While near term outlook for discretionary demand looks uncertain, medium to long term growth story looks promising owing to favourable demographics, low interest rate, rising per capita income and low penetration.
Given still evolving situation and lockdown with social distance being the only solution to overcome, it is fair to assume significant damage to the economy in the near term. Recovery will be contingent upon how quickly we can overcome this pandemic, further supported by fiscal stimulus and transmission of low interest rate. In this process, it is fair to assume income losses to the individuals as a result of job losses and salary cuts which might result in demand suppression for discretionary categories. Furthermore, it might also result in near term pause on premiumisation trend across the categories. Companies with agile supply chain management, digital marketing precision and omni-channel presence supported by good balance sheet should outperform and emerge as key winners.In this market correction, consumer staple companies have outperformed consumer discretionary because of relatively lower impact on near term earnings. At this juncture, we find good opportunities to invest in good quality businesses with decent margin of safety, which otherwise might not have been part of the portfolio because of rich valuation.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
Mr. Ankit Jain, Associate Fund Manager- Equity, Mirae Asset Investment Managers India Pvt. Ltd.