Over the past few quarters,consumer spending has declined significantly. Growth of private household consumption expenditure dipped to a five-year low of 1.6 per cent in Q1 of FY14. Weak economic activity,as indicated by weak IIP data,and high inflation are responsible for the moderation in consumer demand. The decline in spending is more severe in urban than in rural India. Going forward,rural consumption is expected to improve following good monsoons coupled with government spending in social benefit programmes but urban spending is expected to remain weak. However,despite the grim picture,mid-cap consumer companies have shown resilience and posted relatively lower moderation in growth than large-cap companies. CRISIL Research says it is confident that select mid-cap consumer companies have good long-term growth prospects driven by healthy business fundamentals. Growth moderation in consumer space but mid-caps show resilience Growth in the consumer space has moderated from 24 per cent in Q1FY12 and 20 per cent in Q1FY13 to 13 per cent in Q1FY14. The moderation is more apparent in large consumer companies as average growth in large consumer discretionary group and consumer staples has moderated from 25 per cent in Q1FY13 to 14 per cent in Q1FY14 and from 18 per cent in Q FY13 to 12 per cent in Q1FY14,respectively. In contrast,the mid-cap consumer group has witnessed relatively lower moderation in growth from 23 per cent in Q1FY13 to 19 per cent in Q4FY13,which again improved to 21 per cent in Q1FY14. We attribute this resilience to their strong market position,attractive market opportunity and shift from the unorganised to organised segment in their respective industries. select mid-cap consumer companies to register strong earnings growth Select mid-cap consumer companies have good long-term growth prospects,largely driven by healthy business fundamentals and attractive market opportunity. Under CRISIL Research coverage,the mid-cap consumer companies are expected to post healthy revenue CAGR of 18 per cent and a PAT CAGR of 20 per cent over the next four years. These companies have strong market position led by well-known brands and wide distribution network which gives them reach to smaller cities. In addition,they have attractive market opportunity as their industries are highly unorganised and relatively less penetrated. Key drivers of growth Benefit from increase in rural income Incomes in semi-urban and rural India have grown at an average rate of around 14 per cent over the past five years. In our opinion,the consistent growth is driven by increase in farm income and various social benefit programs such as MGNREGA introduced by the government. The government has consistently increased the minimum support price (MSP) of various agricultural products as shown in figure 7 which has also led to significant increase in farm income. As a result,companies whose sales are leveraged to spending in semi-urban and rural income are poised to do well. improvement in farm income to support rural consumption Good monsoons this year coupled with continued government spending in social benefit programs such as MGNREGA could increase farm income and revive rural consumption in FY14. Farm GDP growth is estimated to improve from 1.9 per cent last year to 4.5 per cent in FY14 and private household consumption growth is estimated to improve to 3.8 per cent in FY14 from 1.6 per cent in Q1FY14. However,weak economic activity is expected to remain a drag on overall consumption. Market opportunity driven by unorganised segment Mid-cap companies have attractive market opportunity as their respective industries are underpenetrated and are highly unorganised. To substantiate,the sanitary ware market and LPG gas stoves market are relatively less penetrated than various FMCG product categories. Separately,considering growing brand awareness among consumers,we believe the organised players with a wide distribution network are well poised to benefit from the increase in brand awareness,particularly in smaller cities. Market position led by strong brand and wide product portfolio Companies with strong brand strength and a wide product portfolio have a strong market position and are well poised to benefit from the growing shift from the unorganised to the organised segment. Similar,to the large-cap consumer companies,the mid-caps also give equal priority to branding activities as reflected in the increase in SG&A spending. In addition,a wide distribution network enables them to reach the smaller cities and benefit from growing income in semi-urban and rural India.
