Discretionary consumption coming back: Amnish Aggarwal – The Economic Times

Clipped from: https://economictimes.indiatimes.com/markets/expert-view/discretionary-consumption-coming-back-amnish-aggarwal/articleshow/80768959.cmsSECTIONSDiscretionary consumption coming back: Amnish AggarwalET NowLast Updated: Feb 09, 2021, 05:17 PM ISTSynopsis

‘Small and medium scale enterprises have been under pressure.’

Shift towards organised & larger players accelerated in last 6 months, says Amnish Aggarwal, Head of Research, Prabhudas Lilladher.

Barring a few, most of the FMCG companies have posted their earnings. Is there any specific trend that you have spotted that has worked well this particular quarter?
It is very clear that the discretionary segments are coming back. Look at paints, look at a company like Pidilite. All the out-of-home categories such as those in skin care and other segments have started coming back. Some of the hygiene-related segments like sanitizers and food products which were being used more when the consumers were sitting at home, are now witnessing a gradual slowing down or are coming back to normal levels.

When we spoke to some of the managements, one concern was a rise in raw material costs. Do you expect any further price hikes in the offing?
The raw material price increases have been very selective. For example, tea is one category which has experienced a very sharp increase in input cost. Palm oil is another. Some of the other food related inputs whether it is sugar, wheat, even milk prices have been benign. Most of the things which are in the crude-linked basket are showing a sharp upsurge. Also, some of the other products are showing an upsurge selectively.

To that extent, some of the companies are taking price increases. Toilet soaps have seen price hikes. Tea companies have raised prices. Rest it depends upon what will be the trend going forward. There is a likelihood that some of these products — be it palm oil or tea — have already seen the peak in terms of the raw material prices. So to that extent, I would say that the companies might resist from taking the prices up further but if some of these trends sustain for some more time, further calibrated price increases in the coming quarters or months can’t be ruled out.

Are you seeing consolidation in the discretionary and staples space given the fragmented nature of the industry?
In case of staples, most of the companies which have declared the results, the underlying growth in the economy has not been that much. So, I believe the small and medium scale enterprises have been under pressure. As a result of superior supply chain capabilities because of better go-to market initiatives and the consumer shift towards more hygienic products and companies with better manufacturing capabilities, there has been an accelerated shift towards the organised and larger players in the last six months or so.

Now when it comes to a lot of discretionary segments, it will be very category specific.

If you look at some of the food products companies and at some of the QSR chains, there is a very clear demarcation now that consumers are preferring more hygienic products. So to that extent, I would say that the Covid-19 after effects will result in higher growth coming for the large and organised players in comparison to the smaller ones and the shift towards the organised has actually become much more clear and much more accelerated. It is going to stay like that at least in the near to medium term.

What is the outlook on rural demand which has been outpacing urban demand for the last couple of quarters? Will companies with more rural salience see better growth going forward?
In the last 12 months or so, not only for consumer goods but for the entire economy, rural has been the saving grace because the last year’s monsoon was good followed by this year’s monsoon and harvesting went on smoothly even as due to Covid-19 lockdown, the entire industry was impacted.

So, rural so far has done very well and I see no reason for it slowing down at least in the immediate term. We had good monsoon, good harvesting and the crop prices were good but of late, there has been some softening in the prices of some of the agricultural commodities or the products. But having said that, the outlook remains pretty good for rural India.

If the overall infrastructure push by the government pans out and creates jobs for millions of labourers, artisans, carpenters and people at the bottom end, a lot of these people actually come from the rural areas which are near the small towns and big towns. If that transpires, we might be in for a time where rural growth might remain ahead of urban growth for a considerable period of time.

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