Mumbai: Revenue growth of consumer discretionary companies in India has hit a 20-year low and they are expected to report weak earnings for the December quarter as the consumption pattern for products across all categories remains sluggish, according to a report by Jefferies.For latest news on Business & Budget 2017, like us on Facebook and follow us on Twitter.
Discretionary companies include automobiles, luxury goods and high-end retail, among other categories.
"Earnings expectations have been tempered across the sector, more so for discretionary companies and to a lesser extent for the large staples companies. Expectations over the next few years are now considerably lower than historical growth rates," the American brokerage said in its earnings preview report, without quantifying it.
"Discretionary consumption is unlikely to worsen from here, and we are yet to see strong signs of recovery," the report said, adding that FMCG companies are faring slightly better now but they still face further risks from the deepening rural and low-end consumption down-cycle.
The report also warned of deflationary trends saying revenue growth for consumer companies has been under pressure for several quarters, now the biggest worry is the deflationary trends setting coupled with weak volume growth.
"In real terms, though, FMCG segments seem to be faring better than discretionary categories, where growth has now dropped even below historical lows. While one might wish to bank on the resilience of FMCG, past data suggest that nearly all consumer companies suffer badly in a prolonged slowdown of the kind we are witnessing now," the report added.
Against the backdrop of a weakening rural and low-end consumption cycle, risks to FMCG growth seem significantly high, it said, adding that the only solace being the benign commodity prices, which has boosted profitability for consumer companies.
"This is particularly true for paints and the smaller FMCG firms that have grown earnings far ahead of the sector in recent quarters. Margin gains in paints could likely sustain given the nature of the industry," it said.
However, it is cautious on the margin trajectory for the smaller FMCG companies, as it expects them to pass on the benefits of benign commodity in a weak demand scenario. The report also noted that despite lingering slowdown, valuations for companies continue to be high.