IN a quarter marred by below average monsoon, companies continued to feel the pressure of deceleration in rural demand. While analysts had already built in muted demand pick-up in their earnings expectations, several companies have failed to meet these estimates, confirming the intensity of demand slowdown faced in a quarter when India faced its driest monsoon since 2009 with rainfall trailing the average by 14%.
Not surprisingly, Hindustan Unilever (HUL) reported a more than 2% y-o-y decline in earnings to Rs 962 crore even as India’s biggest consumer goods company managed to maintain a 6% volume growth for a third consecutive quarter. The Indian arm of Anglo Dutch group Unilever, which has reduced prices of its products from soaps and detergent (S&D) segment by 7% in the fist half of fiscal 2015-16, reported a muted 3% volume growth for the category. The management indicated that as pockets of India witnessed deficit monsoon, the slowdown in rural demand has persisted.
It indicated that from a value perspective, rural growth, which used to 1.5 to 1.6 times urban growth, has now come down more or less to match the urban growth.
According to Harsh Manwani, chairman of HUL, although currently the company does not see any evidence of rural demand falling, it is difficult to call out whether there is a reversal of a trend towards the high-growth trajectory we saw a few years back.
Pricing pressure also seems to have weighed on the earnings performance of Asian Paints during the July-September quarter, during which the paint producer — with the highest domestic market share — reported a 2% jump in domestic business despite managing ‘high single-digit volume growth’.
Analysts say the benefit of lower commodity prices was offset by poor product mix as the demand was concentrated towards economy products from the distemper segment. As the reported earnings of Rs 399 crore lagged analyst estimates by more than 9%, as many as three brokerages lowered their stock ratings on Asian Paints.
At a time when the rural wage growth has slowed down to its lowest in 10 years, the demand for two-wheelers remains under pressure and is well reflected in the 1.7% y-o-y decline in Hero Motocorp’s topline growth for Q2FY16.
Acknowledging the weak industry environment, the company’s management decided to lower its capex for FY16. In an analyst call, the management indicated that the earlier guidance to invest R3,000 crore over FY16-17 will now spill over to FY18 as well.
The asset quality of many NBFCs has come under pressure as weaker monsoon impacted their farm equipment portfolios. For instance, L&T Financial Services witnessed its gross NPA based on 150-day cycle at 3.08% due to above normal delinquency in the farm portfolio.
Although, for a while, its earnings continue to reflect below normal rural demand, M&M financial services missed analyst estimates by nearly 25% as it reported higher-than-expected deterioration in asset quality. This led to JPMorgan reducing its FY16 EPS estimates by 11%, citing higher credit cost on account of worst-than-expected rural demand and impact of a transition to the 120-day non-performing loan cycle.
“We have been saying this for last few quarters that we are yet to see any major fundamental shift in terms of feeling very happy about growth returning back to normalcy,” said Ramesh Iyer, MD, M&M Financial Services, in an analyst call.
The slower pick-up in rural demand also weighed on a seasonally weak quarterly performance of Idea Cellular, due to a higher proportion of rural subscribers. Even ACC and Ultratech cement failed to meet analyst estimates on net profit by 6% to 9% with the former having witnessed flat y-o-y volume growth for three months to September 2015.
According to HSBC, cement demand has not picked up domestically and, with subdued construction activity during the monsoon season, the offtake has been weak during the quarter. “The situation is particularly poor in Southern India, with demand contracting during the quarter compared to minor growth in other regions.”
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