Slowdown in two-wheeler sales may spell bad news for FMCG firms like HUL: Goldman Sachs

MUMBAI: The slowdown in the sales of motorcycles and scooters could spell bad news for India’s consumer good companies, notably top player Hindustan Unilever, says a Goldman Sachs research report that has spotted a strong co-relation between the two sectors.

A recent report from the equity research arm of the world’s most profitable investment bank has alluded to a 71% co-relation between the performance of HUL and that of the twowheeler industry. A bad showing by the two-wheeler industry usually portends bad times for the top FMCG player in the subsequent quarter.

Two-wheeler year-on-year volume growth for the third and fourth quarters of 2012-13 at 0.8% and (-)1.3%, respectively, are significantly below the past 10-year average of 11.7%, Puneet Jain and Aditya Soman of Goldman Sachs wrote in a report dated April 11. “Likewise, HUL’s volumes in 3QFY13 were the lowest in the past three years at 5%, also below the 10-year historical average of 7%.”

FMCG, auto and consumer durable companies are under pressure as they are seeing a slowdown in most categories, especially in those involving discretionary spending, or spending on products and services that are not necessary or mandatory.

After growing at a heady pace of over 20% in FY10 and FY11, twowheeler segment grew 14% for the fiscal ended March 2012, before hitting a four-year low of 2.9% last fiscal with sales at 13.7 million two wheelers.

The consumer goods industry has also experienced a slowdown, albeit from a higher base. Over the first nine months of 2012-13, discretionary growth slowed to 17% year-on-year from 31% in the previous year, according to a recent Credit Suisse report.

HUL has been expanding premium offerings across segments over the last several quarters, a key trigger for its high growth during the last two financial years. Its parent Unilever, in its latest annual report, has alluded to the risk of a modest slowdown in China, India and Brazil.

Brokerage firm JP Morgan too notes that HUL’s stock has historically reacted to changes in volume growth.

“Our recent interactions with HUL management and other FMCG players indicate that premium discretionary personal care and packaged food segments are witnessing moderation in growth rates,” JP Morgan’s Latika Chopra said in a report last week. “Issues related to Fair & Lovely sachet pricing transition, the high base effect for shampoo sales and lower growth for modern trade (accounts for ~15% of HUL’s sales) further continue to weigh on volume growth for HUL,” the report said.

That explains HUL’s performance on the bourses. For the six months ending April 16, HUL’s share has fallen around 18%, compared to a 2% slide in benchmark Sensex during the same period. HUL closed at Rs 485.5 on Tuesday.

But not everyone agrees with the theory of HUL mirroring the trend in two-wheeler sales. “In FMCG, it’s a Rs 5 purchase and companies can give oneplus-one free offers. If consumers feel any slowdown pinch, they can downsize to lower priced products but volume can still grow. However, two-wheeler (purchase) is still discretionary and slowdown directly impacts volume growth,” says VG Ramakrishnan, managing director at Frost & Sullivan, South Asia.


Since April, several consumer goods companies have been aggressively discounting in an effort to win over shoppers, especially ones that have slowed down discretionary spending. Falling input costs are helping too. Prices of crude oil and palm oil — key ingredients for soaps and detergents — have declined 7% and 3%, respectively, month-on-month, helping P&G, HUL and ITC offer promotional discounts on some of their brands.

HUL is likely to post a growth of 11% in sales and profit during quarter ended March 2013, according to a poll of 24 brokerage firms extracted by Bloomberg.

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