India's Unilever Problem
Unilever's Indian unit is looking less like a consumer goods empire and more like a faltering commodities business. The multinational's struggle is emblematic of a larger problem. Despite economists' claims that the country will be a major beneficiary of the global raw materials rout, the gains are nowhere in sight for companies plugged into India's domestic demand.
Sales growth at Hindustan Unilever slumped to a worse-than-estimated 3.2 percent in the December quarter, its weakest in more than six years, according to data compiled by Bloomberg on comparable revenue.
Worse still, this revenue expansion has, over the past three years, shown a disturbingly high 74 percent correlation with changes in the Thomson Reuters/CRB commodity Index. In other words, the Anglo-Dutch company has been forced to pass on most of the 40 percent drop in raw material prices during this period to Indian consumers of its soap, detergent and other consumer products, but without a commensurate increase in sales volumes.
As more Indian companies report earnings over the coming days, investors may be disappointed to discover that falling prices of energy and other resources, touted as a bonanza for a commodity-importing country like India, are failing to whip up consumer demand. Goods have indeed become cheaper, and yet not many more of them are being bought.
The per-share quarterly revenue of the 59 members of the BSE Fast Moving Consumer Goods Index shrank by almost 5 percent in the September quarter, according to Bloomberg data. A contraction in the current period would be the third in succession, the worst performance on record for the Indian staples industry.
Two years of poor rains and slumping prices of global agricultural products have curbed spending by farmers. Meanwhile, consumer demand in urban India is being held back by low investment and employment growth as well as fiscal belt-tightening -- the government has been raising taxes and duties on fuel prices rather than passing the full benefit of cheaper gasoline to households. Since June 2014, when crude oil prices began their downward slide, gasoline in Mumbai has become cheaper by 17 percent. Brent crude prices collapsed by 75 percent during the same period.
Add to this a largely state-controlled banking system saddled with bad loans which may be in excess of 11 percent of all advances, and analysts' estimates of Indian corporate earnings seem out of touch with reality. The average price-to-earnings ratio for the 69 Indian companies on the MSCI ex-Japan index is a just a little short of 19. That's already about an 80 percent premium over Chinese shares on the same index. But when it comes to consumer goods companies, Indian equity valuations are sky-high at 32 times future earnings, compared with less than 15 for Chinese stocks. As long as India's Unilever problem continues to hold sway, consumer companies might find it hard to live up to those lofty expectations. For investors, that might be one of the bigger risks in India this earnings season.
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