India’s Consumption Story Turns Dull

Recent data indicates that the sectors which performed well in Q2FY25 are automotive, consumer services, healthcare, realty and telecommunication, while consumer durables have shown a poor performance with a majority of the FMCG companies riding on the slow track, except for a few. Manoj Reddy Sama takes a closer look at what’s going wrong with the category of consumer products 

Over the past year, the Nifty 50 index has delivered subpar returns of 7.36 per cent. But, the Nifty India Consumption index has delivered returns of 15.65 per cent, outperforming the Nifty 50 index. The Nifty India Consumption index represents a diversified portfolio of companies from the domestic consumption sectors such as consumer durables, fast-moving consumer goods (FMCG), healthcare, automotive, telecom services, pharmaceuticals, hotels, media and entertainment, etc. This article delves into the performance of various sectors and evaluates the consumption theme’s future prospects. 

Sector Performance Analysis
It’s clear from the above data that the sectors which performed well in Q2FY25 are automotive, consumer services, healthcare, realty and telecommunication while consumer durables have shown a poor performance with a majority of the FMCG companies functioning on a subdued note, except for a few. Power stocks showed a mixed performance. Automotive companies with the exception of Mahindra and Mahindra, Eicher Motors and TVS Motors posted weaker than anticipated results due to slow-moving urban demand, which impacted the sales and profit growth of the companies. 

Mahindra and Mahindra outperformed, driven by strong demand for their aspirational and feature-rich SUVs and good farm segment performance. Meanwhile, Eicher Motors excelled as a premium segment player. Consumer durable companies like Titan and Asian Paints faced challenges due to increasing competition and weaker demand for their products, Havells posted a muted performance. Consumer service companies like Zomato and Trent posted good results due to expansion into new services. 

Indian Hotels, on the other hand, posted strong numbers due to tailwinds in the sector on account of increase in tourism and travel. Most of the FMCG companies posted a weak sets of results due to an ebbing demand situation in the urban markets. 

Major hospitals like Apollo Hospitals and Max Healthcare witnessed improved occupancy and average revenue per occupied bed, which led to an increase in their profits. Meanwhile, DLF witnessed a good set of numbers due to increased demand for luxury properties. Telecom company Bharti Airtel did well on account of the 25 per cent pricing hike during the end of June. 

Demand Dynamics: Urban versus Rural Consumption 

The critical factors influencing India’s consumption are the urban and rural demand. During Q2FY25, domestic consumption demand remained sluggish. Urban markets, in particular, faced headwinds due to persistent inflationary pressures and limited job opportunities. High repo rates further dampened consumer sentiment, resulting in a muted demand for staple products. Conversely, rural demand showed signs of recovery, buoyed by favourable monsoon conditions and increased government spending. In Q3FY25, urban consumption trends continued to lag, while rural demand maintained a gradual upward trajectory. Seasonal challenges, such as delayed and warmer winters, are expected to weigh on the demand for winter-related products, further dampening the growth prospects. 

India’s Unique Consumption Landscape 

India’s consumption trajectory is often compared to that of China, but significant differences exist. Unlike China, which experienced a manufacturing-led growth model, India bypassed a robust manufacturing phase and transitioned directly into a service-driven economy. The services sector has been the primary engine of growth and employment. While the services sector has created wealth and driven urban consumption, it has limited capacity to absorb surplus labour from the agriculture sector. 

This structural anomaly has skewed India’s consumption base, fostering a trend of premiumisation. Limited manufacturing employment opportunities have constrained mass-market demand, while urban affluent consumers have driven the growth of premium product categories. This is what is visible in consumer companies and those playing the premiumisation trend are witnessing good demand, while companies catering to the mass segment are showing muted or subdued results. 

Premiumisation has been a key growth driver, particularly given the small consumption base and the income impact during the corona virus pandemic. In the post-pandemic period, spanning FY20 to FY24, rural demand remained sluggish for most of the time due to factors such as weak rural wage growth, high inflation, and suboptimal monsoon seasons. Rural demand is influenced by drivers like agricultural wage growth, MSP (minimum support price) increases and government spending or transfers. Positive trends in these factors resulted in stronger rural demand during the corresponding quarters. 

Key Catalysts in the Medium Term 

1. Union Budget 2025
The Union Budget, scheduled for February 1, 2025, will be crucial for the FMCG sector. Increased allocations toward agriculture, rural infrastructure and welfare schemes could provide a significant boost to rural demand. Higher MSPs and direct cash transfers to rural households would further support consumption in these markets.

2. RBI Monetary Policy
The Reserve Bank of India’s upcoming monetary policy meeting in February will also have a significant impact on consumer sentiment. A rate cut could lower borrowing costs, boosting consumer spending. Conversely, an unchanged repo rate might weigh negatively on demand recovery, particularly in the urban markets. 

Conclusion 

Premiumisation is expected to perform better than the mass segment. Companies with brands or categories targeting both the urban and rural premium segments are likely to achieve higher growth compared to other sub-segments. Alcoholic beverage companies playing on the premiumisation trend are projected to witness strong growth, supported by regulatory tailwinds, increased demand for the ‘prestige and above’ category, and a rise in the number of weddings. While premium segments continue to grow across categories, mass-market growth remains under pressure. 

It makes sense for an investor to invest in companies that focus on innovation and are scaling up their operations and distribution networks, such as Zomato, Trent, Godrej Consumer Products, Indian Hotels Company, Tata Consumer Products, and companies witnessing tailwinds like Indian Hotels. Given the prevailing uncertainties surrounding the Indian macroeconomy and Donald Trump’s administration and its policies, investors should be selective, prioritising companies with medium-term growth prospects and attractive entry points following the recent market corrections.