Earnings Commentary Indicates Urban Consumption Losing Steam, Near Term Reversal Unlikely

Management commentaries by fast-moving consumer goods companies indicate that headwinds to growth will continue in the near term.

Urban consumption has continued to show signs of a slowdown amid tightening credit, rising costs and stagnant wage growth. A sentiment analysis of management commentaries from Asian Paints Ltd., Dabur India Ltd., Marico Ltd. and Hindustan Unilever Ltd. ranged between -40 to -60 on urban areas, on Daniel Soper's sentiment analyser.

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Numbers for the October-December 2024 quarter indicate weak demand period, Amit Syngle, chief executive officer at Asian Paints said. "Overall consumer sentiment has been muted, as we are seeing across a lot of industries, and that is true for the paint industry as well," Syngle said. Festive demand, too, was weak, he said.

Overall, for the fourth quarter, "the urban centres are appearing as a stress area for us", Syngle said. However, rural demand should definitely be better, along with expectations of a pick-up in industrial demand, he said.

"We would look at getting stronger value growth, at least, single digits, as we go forward, but right now, we see a stress in terms of the two quarters as we go ahead," Syngle cautioned.

"We saw that all the seasonal geographies, especially geographies which are centered around the northern, and central parts of the country, underperformed," Syngle said. Despite the festive season in October, overall demand remained lacklustre, he added.

While there is some softening in raw material prices, the buoyant dollar is also a concern, Syngle said.

Echoing similar views, Dabur CEO Mohit Malhotra also said the quarter presented a challenging operating environment, marked by unfavourable weather conditions and a slowdown in consumption.

India experienced delayed and contracted winters, with October and November being the warmest in many years, he said. While urban demand showed signs of moderation, rural markets remained resilient, according to him.

Demand Compression 

Urban growth continues to moderate, while gradual rural recovery is sustained, said Rohit Jawa, managing director and CEO at HUL. The real issue is demand compression, he said.

Reflective of the current macroeconomic situation, market data for the quarter shows a step-up in the pace of growth for small packs across the portfolio, Jawa said. This seems to be a transitory shift in consumer patterns, due to current macroeconomic conditions and moderation in urban growth, he added. Still, the secular trend of premiumisation remains resilient, with premium segments growing ahead of mass segments this quarter, according to Jawa.

"Looking at even the last five years — Covid and post-Covid, when inflation peaked in 2022 — we have seen this behaviour, where impacted disposable income of household typically leads to titrating volumes of purchase," Jawa said. "That was a new behaviour we saw in the December quarter," he said.

HUL Chief Financial Officer, Ritesh Tiwari, also said the moderation will continue. When this behaviour comes, it remains for a couple of quarters, Jawa said. "So, we do believe this will be there for a quarter or two more, he said, adding it is transitory in nature."

Pace of recovery will be determined by three macro factors — employment, real wage growth and food inflation, Jawa said. "If those three improve and consumer confidence, then we (will) see urban consumption also click up," Jawa said, adding the recent stress does appear to be coming in more for food inflation.