JPMorgan’s Latika Chopra Shares Insights On Staples Consumption In India
#JPMorgan’s Executive Director Latika Chopra talks about the trends in staples consumption and the way ahead, on the sidelines of #JPMorganIndiaInvestorSummit. #BQLive
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00:00 Hello and welcome.
00:01 This is Agam Vakil representing BQ Prime, and we are on the sidelines of the JPMorgan
00:07 India Investor Summit.
00:09 We're taking stock of the consumption sector in India, how things have panned out over
00:13 the previous few months, and what we can expect going forward.
00:17 And for that, we are in conversation with Latika Chopra.
00:20 She is the executive director and leads consumption research for JPMorgan.
00:24 Latika, thanks for joining in and taking the time out for us.
00:28 Latika, I'm going to start off with the question that everyone has on their minds with respect
00:33 to the consumption volumes at the moment.
00:36 We've seen a little bit of an improvement in the quarter gone by.
00:39 The question really is that has – well, are we expecting a little bit of an arrest
00:44 when it comes to decline in volumes?
00:47 That's the first question.
00:48 The second one to that is that when can we actually see a meaningful increase in volumes,
00:53 even keeping the low base aside?
00:55 What's the way forward from here?
00:58 Thank you, Agam, for inviting me to your show.
01:01 Yes, the Indian FMCG consumption has seen quite a dichotomy, where the mass consumption
01:07 has been really impacted on account of inflationary pressures.
01:12 And a lot of that has been driven by rural weakness.
01:15 And after five quarters of rural volumes actually declining, we have now started to see this
01:20 moving to the positive zone in the June quarter.
01:24 We still feel that things are a little uncertain here, but nevertheless, we are hoping that
01:29 this little improvement gradually strengthens as we go into the coming quarters.
01:33 And what is going to drive this, in our view, is going to be, you know, moderating pricing
01:38 for the consumer goods.
01:39 Clearly, we are seeing companies proactively reducing prices in certain categories, whether
01:44 it's soaps, laundry, shampoos, edible oils, tea.
01:49 And of course, in the rest of the categories, the pricing growth has stopped.
01:52 Rather, in most of the categories, we are going to start anniversarizing on that front.
01:57 And this should spur, you know, volume growth to recover.
02:00 That's the first part of it.
02:02 And the second part is that the companies themselves are getting more aggressive on
02:05 advertising and promotions, which is going to basically also aid improving volume growth.
02:10 So for the leading FMCG companies, which are kind of clocking, you know, flat to low single
02:15 digit volume growth, we anticipate this volume growth momentum will gradually gravitate towards
02:20 mid single digit volume growth in the second half of this fiscal year.
02:24 And that's what we're building in our base case scenario.
02:27 But I should point out, this is going to be a very gradual recovery.
02:31 Consumer behavior changes do take a lot of time to really play out.
02:36 And hence, you know, it's not that things are going to be booming, but definitely trying
02:40 to get better at the margin.
02:42 Right.
02:43 Fair enough.
02:44 So based on that, what is your assessment?
02:47 On currently on input inflation and with regards to that, the product pricing at the moment,
02:54 you said that there has not been too much in terms of inflation, the product pricing
02:59 and the impact on margins and profitability.
03:02 Yes.
03:03 So I think, you know, one positive thing that, you know, the sector is witnessing, thankfully,
03:08 is that, you know, gross margin momentum is moving in the right direction.
03:13 Rather, I think in some of the cases, even tracking better than what we were expecting,
03:17 because companies started to use the low cost inventories, you know, so after gross margins
03:22 taking a big hit much of last year, we are starting to see gross margin build up really
03:26 playing out sequentially for nearly every company.
03:29 Though, you know, part of these gains are being reinvested in higher brand spends and
03:34 marketing spends and some of the promotional spends.
03:37 But nevertheless, you know, EBITDA margin is also on a recovery path.
03:40 I think as of now, companies are in a comfortable space, I think for another quarter or two,
03:44 you know, they still have low cost, you know, commodity covers, which they can work with.
03:49 But of course, one needs to keep their eye on, you know, commodity inflation as always.
03:53 So you know, crude prices, which have formed up recently, if they flare up meaningfully
03:58 from current levels, I think that will be another conversation that we'll be having
04:02 a few months down the line.
04:04 And if it sustains at those levels, companies might be forced to, you know, take a rethink
04:07 on pricing.
04:08 But as of now, I think we are in a relatively more comfortable zone on gross margin front.
04:14 EBITDA margin are also recovering.
04:16 We are not getting back to pre-pandemic levels on EBITDA margin front.
04:22 And our view is that, you know, we are kind of anticipating that to kind of come through
04:26 in FY25.
04:27 Right.
04:28 You know, another question that's on a lot of investors' minds is that when it comes
04:33 to rural wages, they still seem subdued at the moment.
04:37 We have seen an erratic monsoon, not exactly playing out a script.
04:42 And based on that, what is your assessment of the rural economy, especially given that
04:49 we are going into election year, so we likely to see an increased government expenditure
04:53 coming through?
04:54 Yes.
04:55 So, you know, clearly uneven monsoon this time, you know, has emerged as a risk.
05:01 You know, after a rainy July and a dry August, you know, September rains have revived.
05:06 And the monsoon deficit, as we speak, stands at about 6 percent versus, you know, where
05:09 we started at about 11 percent at the beginning of the month.
05:15 I would say, you know, if you look at the company narratives, if you look at, you know,
05:20 the Nielsen data, you know, where you started to see rural uptick happening, you know, moderating
05:25 inflation is definitely helping the cause.
05:28 What is the impact of this kind of monsoon?
05:30 And we are still to end the month, but, you know, we can only know for certain with a
05:34 lag.
05:35 And if you look at the historical data, you know, it's interesting that there is no material
05:40 correlation between FMCG volume growth rates and the monsoon data also.
05:44 So, you know, there are other factors at play as well.
05:47 I think for now, we would work with a gradual rural recovery in terms of volumes.
05:53 And yes, you know, election related spending, you know, how locals, you know, how state
05:58 governments spend, etc. also needs to be seen.
06:01 If that comes through, I think it could be a positive, you know, supporter for the consumption.
06:07 But yeah, a place to keep an eye on.
06:08 It's not very clear.
06:09 It could be a little volatile.
06:13 And hence, we are building in a slow recovery as far as rural growth rates are concerned.
06:18 Right.
06:19 And I take that urban demand has been relatively stronger as compared to rural demand.
06:24 How are you viewing that going forward?
06:26 Is that going to continue to support overall demand?
06:30 So let me split, you know, urban demand into two buckets.
06:32 So you know, on the staples side, as you correctly pointed out, you know, the FMCG demand has
06:37 been relatively better.
06:39 It's been more resilient.
06:40 You know, the urban FMCG demand growth rates have been trending ahead of rural for quite
06:45 some time.
06:47 And that seems to be holding out.
06:48 But when you look at the urban discretionary demand, you know, that's got a mixed, you
06:53 know, behavior.
06:55 And much of the segments like, you know, QSR, tourables, fashion, all these categories
07:00 have seen an impact, you know, on urban demand due to the inflationary pressures.
07:06 We are kind of lapping one full year of that now.
07:09 And starting December quarter, we have to watch out if there are any green shoots there.
07:13 We also have a festive season, you know, which is later this year, mid-October to mid-November.
07:18 And you know, we are hopeful, you know, it really is good so that it supports the urban
07:23 discretionary demand to come up.
07:24 But nevertheless, you will have a benign base.
07:26 So growth rates in starting December quarter should start looking better, you know, for
07:32 most of these segments in our view.
07:34 On the other hand, we have, you know, segments like organized jewelry or we have segments
07:39 like paints, you know, where growth rates have been fairly good in the recent past.
07:45 We think, you know, you know, of course, the paint demand could have got impacted due to
07:50 a very rainy, you know, July month.
07:54 But clearly a long festive typically helps paint demand.
07:57 So there's going to be a bit of volatility where we could have, you know, a little bit
08:00 of a soft quarter and then a strong quarter and the base effects sort of matter.
08:05 But that segment is benefiting from a strong B2B demand, a good real estate recovery as
08:09 well.
08:10 So that segment could do relatively better on a full year basis.
08:14 And similarly, on the organized jewelry side, I think the share gains from the informal
08:17 market continue.
08:19 And there will be proactive initiatives from the companies also, both on product distribution,
08:24 which can still allow those companies to grow at a faster pace, you know, within the overall
08:29 discretionary basket.
08:30 Right.
08:31 A final question then on the discretionary basket.
08:34 You cover a gamut of subsegments in the discretionary area.
08:39 But I want your view on valuations.
08:41 Do they seem expensive at the moment?
08:43 And if they are, how soon are we expecting earnings to catch up?
08:48 So if you look at the valuations, I think the staples pack by and large, we are kind
08:53 of trending in line with historical averages.
08:56 And I think when you look at relative valuations to the market, we are probably even below
08:59 historical averages.
09:01 But for the discretionary pack also, you know, the trend is similar.
09:04 You know, valuations are still not, I would say, cheap.
09:08 But I guess, you know, they have come down from the, you know, from the earlier levels.
09:15 Earnings downgrade cycle for staples, I think, is slowly coming to an end in our view.
09:19 You know, if you look at last couple of quarters, you will see every quarter, the quotable earnings
09:24 downgrade, earnings cuts is actually reducing in the sector.
09:29 You know, you can never say never, but we think that the earnings downgrade leads to
09:32 the staples is kind of coming to an end.
09:35 And hopefully that should start providing some bit of support to valuations for staples.
09:40 So our strategy level also for JP Morgan in India, our goal is that at least, you know,
09:46 in the near term, our preference is for staples over discretionary, given how the risk reward
09:50 is really playing out.
09:52 Right, right.
09:53 Well, fair enough.
09:54 Radhika Chopra, thank you so much.
09:55 It was a pleasure speaking with you.
09:56 Thank you so much for taking us through your views.
09:59 And that is all we have for this particular view.
10:02 And we will be right back with lots more lineups.
10:05 Stay tuned to BQ Prime.
10:06 Thanks for listening.
10:14 [END]