<div>A confluence of factors, including increasing household income, urbanization, and fragmentation of Indian households, low penetration of branded goods, burgeoning middle class and favorable demographics should lead to sustained long-term growth of fast moving consumer goods (FMCG). At the current GDP per capita (of c.$1,500), S-curve analysis suggests that consumption should accelerate from current levels, be it for categories like deodorants, tobacco, skin care or oral care.<br> </div><div>However, low single-digit volume growth in 2013 and 2014 is in sharp contrast to mid-teen levels of volume growth witnessed by the FMCG sector in 2010. Growth rates of several discretionary categories tapered down. Slowing GDP growth, negative real wage inflation and lack of employment opportunities were some of the reasons that led to a consumption slowdown.</div><div> </div><div>Question that investors often ponder is when would the growth rates revive?</div><div> </div><div>We, at Société Générale, believe that green shoots are visible for consumption recovery, which could be gradual. After hitting a trough in September 2013, Indian consumers have become progressively optimistic about future prospects as reflected in Reserve Bank of India (RBI) consumer confidence surveys. RBI recently also highlighted that consumption demand, especially in urban areas, is picking up while rural wage growth is showing signs of moderation.</div><div> </div><div>Monster Employment Index, which presents a snapshot of employer online recruitment activity nationwide, is up 32% YoY. As consumer increase confidence in future income, they will increase consumption.<br><br><a href="http://bw-image.s3.amazonaws.com/graph-pu.jpg"><img alt="" src="http://bw-image.s3.amazonaws.com/graph-lrg (2).jpg" style="width: 620px; height: 204px; margin: 1px;"></a></div><div> </div><div><strong>Challenges Prevail</strong></div><div>Volume growth for consumer companies has stabilized, but is nowhere close to the double-digit level that was witnessed in 2010. Companies are presenting mixed signals pertaining to rural growth though. While Hindustan Unilever and Emami stated that rural growth rate is in-line with urban growth rate, Godrej Consumer and Marico flagged that rural continues to grow faster than urban. Low penetration of branded consumer goods in rural should offer long term growth opportunity to companies.</div><div> </div><div>The oil price correction is a wild card as commodity tailwind benefits is resulting in gross margins expansion for companies. Onus is on companies now to either invest this amount in terms of increased advertising and sales promotion (A&P), or to pass it on through price cuts to reduce the gap with regional competition.</div><div> </div><div> </div><div><strong>The author, Nitin Mathur is Research Analyst – Emerging Markets Consumer, Société Générale</strong></div><div> </div>
