PFCE grew only 2.2% yoy for the quarter ended September 2013 (2QFY14). As such, a 4.6% yoy jump in the agricultural component of GDP for 2QFY14 from 1.7% yoy in 2QFY13 would possibly have translated into a larger improvement in PFCE. However, the possible reason of this drag is the slowdown in urban spending.
While Ind-Ra expects rural spending to improve PFCE, a possible further slowdown in urban consumption may potentially limit the PFCE growth rate.
The Consumer Confidence Survey (14th round) conducted by the Reserve Bank of India in September 2013 in six metropolitan cities across India suggests that the consumer confidence of urban consumers is deteriorating. In the past, the survey has been, to an extent, indicative of future private consumption.
India's possible moderation in urban spending may be attributed to the weak corporate performance translating into moderate nominal wage growth which often does not beat consumer price inflation.
The estimated negative real wage growth affects the discretionary purchasing power of urban consumers.
The moderation in urban spending may be reflected in the performance of predominantly urban consumption dependent sectors such as quick service restaurants (QSR) and retail. Passenger vehicle (PV) sales also have substantial dependence on urban spending.
QSR: Muted demand for this sector may be reflected in lower or negative comparable same stores sales in 2QFY14. Also, EBITDA margins have been impacted due to the inability of the companies to pass on increases in raw material prices to customers due to weak demand and intensifying competition.
Retail: Median margins for the sector, thus far in FY14, have been marginally better than the corresponding quarters in FY13. Ind-Ra believes this may be attributable to the improved operational efficiency of major players in the sector.
However, given the drag in urban spending, doubt remains over whether the double-digit revenue growth may be maintained at the current levels of EBITDA margin.
Auto: The weakening discretionary purchase power of urban consumers would continue to weigh down PV volumes.
Any meaningful support to PV volumes may come from increased rural spending post a successful harvest season.
--IBNS (Posted on 03-12-2013)