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Slowdown in Consumerism in India (report by Keynote Capitals)

Keynote Capitals analysed the financial performance of 54 listed companies from personal consumption driven industries, viz., FMCG, food products, multiplex operators, automobile (passenger vehicles), consumer durables, newspaper publishing, retailing and jewellery manufacturing on three criteria, viz., revenue growth, EBITDA margin and net profit growth.

We also compared the relative stock price performance of these sectors vis-?-vis the BSE Sensex over the last two years (January 1, 2007 through December 15, 2008). We then computed forward p/e multiples of a number of these companies, on the basis of consensus analyst estimates.

Summary Conclusions

Financial performance of the entire domain group

- Sales growth for the entire domain group slowed down from 23.5% in FY07 to 9.1% in FY08. However, during the trailing 4 quarters upto Q2-FY09, sales growth picked up to 14.9% y-o-y.

- Absolute EBITDA growth too tapered off, from 17.3% in FY07 to 4.1% in FY08. Again, EBITDA grew by 6.8% during the trailing 4 quarters upto Q2-FY09, y-o-y.

- PAT growth too slowed down, from 19.2% in FY07 to 8.6% in FY08, and further to 4.7% during the trailing 4 quarters upto Q2-FY09, y-o-y.

Financial performance of individual sectors

- Consumer (FMCG) and food product companies have been steady performers over the said periods.

- Automobile sector has been hit badly in FY08. However, the sector bucked the trend in terms of sales growth during the trailing 4 quarters upto Q2-FY09, growing by 7.6% y-o-y.

- Sales growth of consumer durables, newspapers, jewellery and retail companies either slowed down or turned negative during the trailing 4 quarters upto Q2-FY09, compared to growth in FY08.

- Food products, automobiles, jewellery and retail sectors reported margin expansion in trailing 4 quarters upto Q2-FY09, compared to FY08.

- All sectors except food products reported de-growth in net profit in trailing 4 quarters upto Q2-FY09, compared to growth in FY08.

In other words, the broad scenario for consumption driven industries is slowdown in growth and deteriorating profitability. There may be a distinct slowdown in personal consumption driven industries, going forward. However, Consumer product (FMCG) companies may remain relatively unaffected, as they manufacture the necessities; however margin impact cannot be ruled out.

Stock price performance of individual sectors vis-a-vis the BSE Sensex

Only two sectors, viz., consumer and food products, outperformed the BSE Sensex during the better part of the last two years till date. This substantiates our view that consumer and food product stocks have been preferred by the market, over other consumption driven sectors.

Forward valuations

The BSE Sensex is currently trading at around 11.2x FY09 earnings. We observed that most of the consumer stocks continue to trade at a huge premium to the Sensex. Same is the case in case of food products and retail stocks and a few stocks from the auto and newspaper sectors.

We believe while consumer and food product stocks may continue to fetch premium valuations going forward, retail sector valuations may be under pressure.

Investor sentiment for multiplex, consumer durables, newspapers and jewellery stocks is unlikely to improve in the near future. However, auto stocks by virtue of extremely modest valuations may be considered as value buys and therefore buck the recent trend.



For detailed report contact

KEYNOTE CAPITALS LIMITED
Tel: +91 22 30266043 (D) / 2269 4322/ 24 / 25