Did India Inc Miss India's Consumer Demand Dip Or Simply Ignored It?
Subtle changes have perhaps led to a slowdown in the economy. Did Indian Inc miss the glaring message in India’s consumer demand data?
It has been clear for several months now that auto sales in India have slowed down. A key indication has been the rise in inventories at dealerships, now at a record 80 days. We’ve argued earlier that there was a probability that this reflected a larger slowdown in the economy and also the end of a post-Covid spike in spending.
A Kotak Securities report, that puts out stock picks for Diwali day trading, has now said that the brokerage was “cautiously optimistic” about India. The words seemed strange and distant given that no brokerage has really used the word caution to describe the Indian markets even until a few weeks ago.
Why The Sudden Caution?
There have been subtle changes that have perhaps led to this outlook. The first to hit reverse gears were the foreign portfolio investors. They have reportedly sold a record $10 billion worth of stock this month. They were mostly heading to China in a desperate attempt to catch the market upside of a series of stimulus measures that the country’s government unveiled in recent weeks. It helped that Chinese valuations were low and Indian valuations were high.
All the fleeing investors and brokerages like Jeffries have so far sworn by India’s longer-term story even as they were dumping stock. Other brokerages like Bank of America and Macquarie similarly reduced India's weightage and increased China.
But if Indian markets were indeed so full of promise, why...
It has been clear for several months now that auto sales in India have slowed down. A key indication has been the rise in inventories at dealerships, now at a record 80 days. We’ve argued earlier that there was a probability that this reflected a larger slowdown in the economy and also the end of a post-Covid spike in spending.
A Kotak Securities report, that puts out stock picks for Diwali day trading, has now said that the brokerage was “cautiously optimistic” about India. The words seemed strange and distant given that no brokerage has really used the word caution to describe the Indian markets even until a few weeks ago.
Why The Sudden Caution?
There have been subtle changes that have perhaps led to this outlook. The first to hit reverse gears were the foreign portfolio investors. They have reportedly sold a record $10 billion worth of stock this month. They were mostly heading to China in a desperate attempt to catch the market upside of a series of stimulus measures that the country’s government unveiled in recent weeks. It helped that Chinese valuations were low and Indian valuations were high.
All the fleeing investors and brokerages like Jeffries have so far sworn by India’s longer-term story even as they were dumping stock. Other brokerages like Bank of America and Macquarie similarly reduced India's weightage and increased China.
But if Indian markets were indeed so full of promise, why are we seeing such an exodus?
Institutional investors always point to earnings as the driver of market prices and valuations. ‘Markets are a slave to earnings’ would be their usual response when asked about valuations. But the latest earnings season has been slow, in contrast to the past.
A Financial Express report said that net profits of a sample of 164 companies (including banks and financials) were up 7% year-on-year on the back of an 8% rise in revenues. But net profits would have fallen but for a 23% jump in other income.
The article said that a miss in estimates across the board suggests the Street has been unable to gauge the extent of sluggishness in demand, whether for IT services or for consumer goods.
So far, the management of most companies has claimed reasons ranging from muted consumer demand, and elevated commodity prices, to higher advertising and promotion spending amidst competitive intensity.
The “cautiously optimistic” Kotak report also pointed not to the earnings but to India’s strong macroeconomic position including an improving fiscal and inflation outlook. The report said that there was a modest improvement in laggard sectors of IT services and consumer staples. But the nuance lies in what the report is not saying, which is the absence of the usual cross-sectoral bullish tone which we have been used to seeing across brokerages.
Glaring Data Points
There are several other data points like Goods & Services Tax (GST) whose growth is down to 6.5%, the lowest in 40 months. This is almost on par with inflation and could arguably mean very little or no growth in volumes. Elsewhere, real estate purchases are slowing and the sales of old homes have slowed further.
While there are various positive data points as well, it seems like this is the end of a cyclical high-growth phase and not a straight line upward as people would have us believe. Quite likely this is a good development for the economy and markets as they cool off and resume their upward journey in good time.
How did no one see this coming until the last moment? For example, Bajaj Auto announced suddenly that festive season sales for two-wheelers were clocking below expectations. UltraTech Cement reported a bigger-than-expected 36% decline in consolidated second-quarter profits on Monday, thanks to cement prices that are at a five-year low at the moment.
Many companies have cited heat waves followed by elections followed by heavy rains across the country as reasons for the demand slowdown. By that logic, demand would have bounced back in the absence of these extraneous factors — which would have been now. Quite evidently, that is not happening, at least not yet.
The question is to what extent did India Inc know about this fundamental problem with consumer demand? Did it not know or did it choose to stay silent and hope against hope? Neither scenario is comforting.
