Vijay Kumar Gaba: Consumer sentiment

Tuesday, October 20, 2020

Festivities missing from this festival season

Last weekend I did my annual festival market check. This year, besides the main markets of Delhi, I visited some local markets in predominately lower middle class areas; and some markets in rural areas of North Delhi. I managed to speak with some very large importer and traders of consumer goods; auto dealers, farmers, real estate developers and owners of leased properties. Based on my observations, interactions and information, I would like to share the following feedback with readers:

· The overall demand situation this festival season is materially worse than the last year. It is pertinent to note that the last year was also not good per se.

· A large importer and trader dry fruits, mainly almonds and walnuts, indicated that global dry fruit prices are down over 25-30% as compared to last year. In India despite supply disruptions due to broken logistic chain, the prices are lower as compared to last year. The retail demand for almonds and walnuts has seen sharp rise as these are seen as immunity boosters. However wholesale demand from sweet and confectionary makers is very poor. Overall, he expects 30% lower volumes this festival season.

· A large importer and trader of confectionary, mainly chocolate, lamented both supply and demand issues for poor business. As per him, import of confectionary was greatly restricted due to breakdown in global supply chain and slow clearance of consignments at Indian ports. He cited 3months delay in clearance in his inbound shipments. On demand side, the festival gifting demand is very slow, especially the corporate demand. Retail sale is gradually picking up but still materially lower than last year.

· Two famous sweet shops in Delhi have witnessed gradual pickup in demand in past two weeks. The sales are about 50% lower as compared to last year. The delayed and curtailed marriage season and minimal corporate gift bookings are major sentiment dampeners. They see a definite trend in lower affordability.

· Textile traders, both wholesale and retail, also cited very slow return to normalcy. None is expecting to reach the 2019 level of demand even in 2021. The demand from rural markets in neighboring states is very poor. Shorter marriage season, restrictions on number of guests, poor affordability, slow return of migrant laborers, and high inventory are bothering the textile traders. Most of them are staring at significant inventory write off.

· It is well known that in many communities, the marriages are arranged with a pre-determined budget for the bride side. The people from these communities are indicating payment of more cash & jewelry, higher end automobile and communication devices to compensate for the lower spending on ceremonies.

· Building material and furniture dealers appeared more sanguine about return to normalcy. They are seeing better than expected retail demand for home improvement and replacement. For the wholesale demand, inquiries are good. They hope for better start to 2021.

· Auto demand has picked up well. Two wheelers strong due to non-availability of normal public transport and fear of using public transport. Cars at pre lockdown level which was not great per se. Tractors and SUVs continue to see strong demand, reflecting the faster recovery in rural demand.

· Home decoration item importers and traders are staring at a washout. With little fresh arrival and low inventory, they expect festival sales to be 50-70% lower. Contrary to popular expectation, the demand for Chinese items remains strong.

Marigold flower prices at Rs70-75/kg, are one third of the last year. Even at these prices demand is poor.

· The scene at local markets in lower middle class colonies and slums, is that of despondency. The need for clothing, utensils, and other household items is visible but the demand is lacking due to poor affordability. The markets are crowded as usual but the sale is much less. People are constantly looking for deals to suit their pockets.

· The markets in rural areas are though much better off. The sale is brisk and people are not averse to up-trading.

· The real estate developers and dealers highlighted that the number of inquiries has increased significantly in past one month. These inquiries are however not yet converting into deals. They feel it will pick up strongly once registration offices begin working normally.

· Owners of leased real estate let out as PG accommodation, working women hostel, shops etc indicated significant vacancies. They do not expect normal tenancy at pre lockdown rental to be restored even in 2021.

· Almost everyone complained of poor working capital financing. NBFCs and Private sector banks have materially curtailed working capital and small capex financing due to poor quality or illiquidity of the collateral and tighter credit norms.

· Almost everyone is working with lesser number of workers compared to pre lockdown period. No one indicated returning to normal workforce level in 2021. Most traders are focusing on survival for 2021. Growth does not seem to be a priority for now at least.

· Farmers in Delhi villages were surprisingly well aware of the implications of the latest legislative changes relating to agriculture sector in India. Most of them believed that these changes are structurally positive for the sector; regardless of the noise being made by the opposition parties and some NGOs. (Caveat: The infrastructure, resources and access available to these farmers is very different from an average farmer in the hinterland. Their opinion may therefore not be reflective of the mood in general.)

· Most people I interacted with and observed seem to have accepted Covid-19 as an uninvited guest in their house which cannot be wished away. They have learned to live with it and are willing to suffer some losses (monetary and human life) for their freedom to work and move around. The public campaign for safety against corona is totally ineffective in most cases and counterproductive in many cases. For example to avoid listening to Corona caution played before each phone call, most of the people prefer to use Whatsapp call now. Inappropriate, dirty and unhygienic face masks are hanged around chin to avoid monetary fines and harassment by authorities. Hand sanitizers have vanished from most public offices. No water is available in the tanks placed in public places for hand washing. No one could care less to discuss whether the government handled the pandemic efficiently. They just want to move on to lead their normal life.

Thursday, June 18, 2020

Investors Beware - 3

The financial sector has massively underperformed the broader markets in past three months. A number of experts have called for increasing exposure to this sector in view of this underperformance. They have argued that valuations are now discounting the worst in terms of COVID-19 related delinquencies and the economic activity shall normalize in next 2-3 quarters. The consensus amongst experts is veering towards outperformance of the sector in next 12-15 months. It appears that many non institutional investors are in agreement with the experts' opinion and have increased their exposure to the banks and NBFCs, especially the low priced ones.

I would like these investors take note of the following data points while increasing their exposure to the financial sector in India.

(a) The capacity utilization of Indian enterprises peaked at 83% in 2011 and has ranged between 70-75% since then. It declined to below 70% in 2QFY20, much before the COVID-19 induced lockdown took place. The business sentiment is at multi year low, indicating that businesses do not see any sustainable rise in capacity utilization and need for capacity addition in short term.

Consequently, the project announcement has declined in past five years, from 17% of GDP in 1QFY16 to about 5% of GDP in past 4 quarters. The project completion rate has also declined materially.

This does not augur well for credit growth in the short term. Any growth in credit demand will come from mostly from consumption and working capital requirement. The quality of credit shall therefore remain under pressure, and ALM issues will persist.

(b) Consumer confidence is at lowest since 2013, and the employment outlook has worsened materially. This shall keep the fastest growing credit category (personal loans) under check as the borrowers' credit profile deteriorates.

(c) The liquidity in the system is surplus, and it is likely to remain so in the short term. The call money rates are now closer to reverse repo rate, rendering overnight market competing with RBI.

Besides, the bond yields are now below bank lending rates, even though the benchmark G-Sec yields are well above the policy repo rate. This shall pressurize banks to liquidate some of their excess SLR portfolios and lend aggressively in the market. The pressure on return ratio may increase while the credit quality remains under pressure.

(d) MF as source of corporate funding (especially working capital and promoter equity) has come under pressure due to a spate of defaults in past one year. This could bring some short term financing business back to banks. But the events of moratorium in case of Yes Bank and PMC Bank have left scare in the memories of depositors. They are increasingly veering towards larger banks, especially large PSBs. The cost of funds for smaller private banks may therefore rise in the short term.

(e) The mutual funds and banks are wary of lending to non AAA rated borrowers, especially NBFCs. The cost of funds and availability of growth capital may remain a major constraints for these NBFCs, at a time when the delinquencies are expected to rise once the loan moratorium ends in August.

Personally, I would exercise little extra caution in making fresh investment in any financial stock. For asset allocation discipline, I shall stick to top 4 banks and top 4 NBFCs.