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<ul><li>The average purchasing power in India is depleting fast that is likely to affect consumer demand.</li><li>However, benchmark indices Sensex and Nifty have recently hit record levels thanks to a surge in corporate profits, most of which came from cost cutting.</li><li>The sustained fall in household savings, both financial and physical assets like gold or real estate, over the last five years has been worsened by the fall in wages.</li><li>This has led to a sharp fall in consumer confidence and that is bad news for companies looking to sell cars, jewellery, home appliances, and even shares and other financial investments.</li></ul>Forget gross domestic product (GDP) and the high-as-a-kite stock markets. Even the Narendra Modi government likes to <a href="https://timesofindia.indiatimes.com/business/india-business/india-gdp-in-ppp-terms-more-than-bdeshs-govt/articleshow/78671559.cms" data-type="tilCustomLink" target="_blank">cite the country’s purchasing power when cornered</a>. But even that is on a slide, a not-so-merry one. It’s hardly a surprise given the knockout punch that the COVID-19 virus has delivered. Businesses looking to protect their bottomline have laid off a lot of employees, and many of those who still have jobs aren’t earning as much as they used to. On the other hand, <a href="https://zeenews.india.com/markets/sensex-hits-fresh-record-high-tops-44000-level-2325095.html" data-type="tilCustomLink" target="_blank">Sensex has kissed new highs</a> because corporate profits have surged in the latest quarterly statements. However, as Mahesh Vyas from the Centre for Monitoring Indian Economy, a business information firm, pointed out, between July and September 2020, corporate profits grew over 20%, the rebound in wages was just 3.8% after a sharp fall in the preceding quarter. And this is likely to be a continuing trend. As <a href="https://economictimes.indiatimes.com/news/company/corporate-trends/why-companies-profits-have-rebounded-faster-than-wages-during-covid-pandemic/articleshow/79308002.cms" data-type="tilCustomLink" target="_blank">Vyas put it</a>, “The lockdown has taught companies a lesson or two on running business with fewer human resources. These lessons are unlikely to be forgotten.” That’s bad news for companies looking to sell cars, jewellery, home appliances, and even shares and other financial investments. There is more evidence of where the profits are flowing from. All the companies analysed by broking firm Motilal Oswal, put together, saw a decline of 7% in sales but a 16% jump in profit after tax. Simply put, most of the profit came from cost cutting and not a rise in demand. Consumer insights firm Nielsen recently explained the phenomenon. The Indian consumer is trading down in certain segments, those who can are buying larger packs to save money, and opting for more private labels. And that’s visible in the gross margin ⁠— before costs like wages, advertisements and promotion are deducted ⁠— of some of biggest names in consumer products. <table style="width: 233pt;"> </colgroup> <tbody><tr> <td class="xl63" style="height:45.0pt;width:129pt">Company</td> <td class="xl64" style="border-left-width: initial; border-left-style: none; width: 104pt;">July-Sep gross margin change (basis points)</td> </tr> <tr> <td class="xl63" style="height: 15pt; border-top-width: initial; border-top-style: none;">Bajaj Consumer</td> <td class="xl63" style="border-top-width: initial; border-top-style: none; border-left-width: initial; border-left-style: none;">-74</td> </tr> <tr> <td class="xl63" style="height: 15pt; border-top-width: initial; border-top-style: none;">Agro Tech Foods</td> <td class="xl63" style="border-top-width: initial; border-top-style: none; border-left-width: initial; border-left-style: none;">-183</td> </tr> <tr> <td class="xl63" style="height: 15pt; border-top-width: initial; border-top-style: none;">Jyothy Labs</td> <td class="xl63" style="border-top-width: initial; border-top-style: none; border-left-width: initial; border-left-style: none;">128</td> </tr> <tr> <td class="xl63" style="height: 15pt; border-top-width: initial; border-top-style: none;">ITC</td> <td class="xl63" style="border-top-width: initial; border-top-style: none; border-left-width: initial; border-left-style: none;">-163</td> </tr> <tr> <td class="xl63" style="height: 15pt; border-top-width: initial; border-top-style: none;">Dabur</td> <td class="xl63" style="border-top-width: initial; border-top-style: none; border-left-width: initial; border-left-style: none;">9</td> </tr> <tr> <td class="xl63" style="height: 15pt; border-top-width: initial; border-top-style: none;">HUL</td> <td class="xl63" style="border-top-width: initial; border-top-style: none; border-left-width: initial; border-left-style: none;">-128</td> </tr> <tr> <td class="xl63" style="height: 15pt; border-top-width: initial; border-top-style: none;">Emami</td> <td class="xl63" style="border-top-width: initial; border-top-style: none; border-left-width: initial; border-left-style: none;">55</td> </tr> <tr> <td class="xl63" style="height: 15pt; border-top-width: initial; border-top-style: none;">Marico</td> <td class="xl63" style="border-top-width: initial; border-top-style: none; border-left-width: initial; border-left-style: none;">-163</td> </tr> <tr> <td class="xl63" style="height: 15pt; border-top-width: initial; border-top-style: none;">Nestle</td> <td class="xl63" style="border-top-width: initial; border-top-style: none; border-left-width: initial; border-left-style: none;">56</td> </tr> <tr> <td class="xl63" style="height: 15pt; border-top-width: initial; border-top-style: none;">Colgate</td> <td class="xl63" style="border-top-width: initial; border-top-style: none; border-left-width: initial; border-left-style: none;">344</td> </tr> <tr> <td class="xl63" style="height: 15pt; border-top-width: initial; border-top-style: none;">Godrej Consumer</td> <td class="xl63" style="border-top-width: initial; border-top-style: none; border-left-width: initial; border-left-style: none;">-57</td> </tr> <tr> <td class="xl63" style="height: 15pt; border-top-width: initial; border-top-style: none;">Britannia</td> <td class="xl63" style="border-top-width: initial; border-top-style: none; border-left-width: initial; border-left-style: none;">176</td> </tr> <tr> <td class="xl63" style="height: 15pt; border-top-width: initial; border-top-style: none;">Varun Beverages</td> <td class="xl63" style="border-top-width: initial; border-top-style: none; border-left-width: initial; border-left-style: none;">-149</td> </tr> <tr> <td class="xl63" style="height: 15pt; border-top-width: initial; border-top-style: none;">Tata Consumer Products</td> <td class="xl63" style="border-top-width: initial; border-top-style: none; border-left-width: initial; border-left-style: none;">-269</td> </tr> <tr> <td class="xl63" style="height: 15pt; border-top-width: initial; border-top-style: none;">Aggregate</td> <td class="xl63" style="border-top-width: initial; border-top-style: none; border-left-width: initial; border-left-style: none;">-220</td> </tr></tbody></table>Source: IIFL, Change compared to same period last year Rational people spend more on discretionary items like cars and appliances when they save more. And the larger pessimism is visible in <a href="https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/CCS09102023E6F5FCA08F4C4BAB9F599F5D9DC754.PDF" data-type="tilCustomLink" target="_blank">the consumer confidence data</a>, put out by the Reserve Bank of India (RBI), which is breaking the charts on the wrong side. People do not expect to spend more on non-essential items even in the next one year. <div type="image" title="rbi ccs" msid="79317971" hostid="261" caption="&amp;lt;p&amp;gt;Indian consumer&amp;#39;s expectation of spending on non-essential items is abysmally low.&amp;lt;/p&amp;gt;"></div> The Indian consumer’s ability or willingness to spend had started eroding long before the pandemic. And, on an average, there has been a steady decline in household savings in India, to a point that this year’s estimate is the lowest since at least 2012. The pinch is much worse for people who are retired, many of whom living on their savings lying at the banks. The interest on long-term fixed deposits make less money compared to the savings account, which is much lower than the current inflation. Essentially, people are paying banks rent to keep their money safe instead of earning from it. <div type="image" title="India household savings" msid="79318175" hostid="261" caption="&amp;lt;p&amp;gt;India household savings, both financial &amp;lt;span class=&amp;quot;redactor-invisible-space&amp;quot;&amp;gt;and in physical assets like gold, are sharply down in the last five years.&amp;lt;/span&amp;gt;&amp;lt;/p&amp;gt;"></div> This should concern markets as well as policymakers. "GDP is an aggregative indicator of economic activity and hides the extent of human misery and the loss of social and human capital caused by the health crisis. Nonetheless, if the projections hold, the GDP would have fallen approximately 6% below its pre-COVID level and it may take years to regain this lost output,” Deputy Governor of the RBI and a member of the Monetary Policy Committee Michael D Patra recently <a href="https://timesofindia.indiatimes.com/business/india-business/rate-cut-will-depend-upon-moderation-in-inflation-rbi-governor-shanktikanta-das/articleshow/78829858.cms" data-type="tilCustomLink" target="_blank">said</a>. The gloom, too, shall pass eventually. But to experience a boom people need jobs, good wages and a feeling of certainty. And that will only come from new corporate investment that can generate employment. And it has to happen sooner than later. Else, India’s famed demographic dividend would have been squandered. SEE ALSO: <a target="_blank" class="c-link c-message_attachment__title_link" href="https://www.businessinsider.in/business/news/from-downward-dog-to-upward-boom-influencer-and-teacher-ira-trivedi-shares-how-virtual-yoga-took-off-during-the-lockdown/articleshow/79317417.cms">From downward dog to upward boom — influencer and teacher Ira Trivedi shares how virtual yoga took off during the lockdown</a><a target="_blank" class="c-link c-message_attachment__title_link" href="https://www.businessinsider.in/business/news/from-downward-dog-to-upward-boom-influencer-and-teacher-ira-trivedi-shares-how-virtual-yoga-took-off-during-the-lockdown/articleshow/79317417.cms"></a> <a target="_blank" class="c-link c-message_attachment__title_link" href="https://www.businessinsider.in/thelife/personalities/news/remembering-ym-deosthalee-the-man-who-struck-the-right-chord-between-music-and-math/articleshow/79306305.cms">Remembering YM Deosthalee, the man who struck the right chord between music and math</a><a target="_blank" class="c-link c-message_attachment__title_link" href="https://www.businessinsider.in/thelife/personalities/news/remembering-ym-deosthalee-the-man-who-struck-the-right-chord-between-music-and-math/articleshow/79306305.cms"></a> <a target="_blank" class="c-link c-message_attachment__title_link" href="https://www.businessinsider.in/international/news/indra-nooyi-may-be-in-joe-biden-cabinet-heres-a-look-at-her-take-on-some-key-issues-concerning-india-and-us/articleshow/79303469.cms">Indra Nooyi may be in Joe Biden's Cabinet – here's a look at her take on some key issues concerning India and US</a>

There is a lot of money in the share market but not enough in your pocket

You would find a Patanjali Ayurvedic store in almost every known locality in India. And if you have had a chance of taking a sneak peek inside the store you must have noticed, they have a variety of products at their disposal right from soaps, shampoos, cosmetics to food products, medicines and <a href="http://www.businessinsider.in/searchresult.cms?query=ayurvedic">ayurvedic</a> products. The shops, which are apparently like any normal brick and mortar stores are licensed by Patanjali and sell products keeping very less profit margins, as claimed by the company. 
 
<a href="http://www.businessinsider.in/topic/Baba-Ramdev">Baba Ramdev</a> is known for his yoga. Besides, his opinions have often led to controversies. And Ramdev promoted <a href="http://www.businessinsider.in/searchresult.cms?query=patanjali">Patanjali Ayurved</a> (PAL) has captured the attention of stock market analysts, thanks to its meteoric rise over the years. 
 
CLSA, an investment banking company has recently come out with a report ‘'Wish you were listed: Patanjali Ayurved'. The study shows, Patanjali is bigger than Emami and Jyothy Labs and is perhaps the fastest growing fast moving consumer company in India with revenues in excess of Rs 2,500 crore for 2014-15. The dramatic growth has been achieved in less than a decade. 
 
In past three years, despite tough rivals, Patanjali’s revenues have increased four folds. PAL's operating margin is around 20% higher than many of its peers which advertise aggressively. 
While most FMCG firms outsource their products and just market, Patanjali played it traditional using the backward integration model. This requires large tracts of land to cultivate and run factories and workshops, thereby investing much more than other players. 
 
Listed <a href="http://www.businessinsider.in/searchresult.cms?query=FMCG+">FMCG</a> firms are currently trading at an average earnings multiple of 46. With revenues of close to Rs 2,500 crore and an estimated after-tax profit of Rs 300 crore, a similar earnings multiple would give Patanjali a valuation of Rs 14,000 crore. 
 
There are plans to come out with malted food drinks, and interestingly, instant noodles, where Nestle, is the market leader. 
 
Even though Patanjali has spent very little on branding and advertising, Ramdev's sermons and his mass following may have had a positive rub off on the products. In gatherings attended by thousands and interviews with news channels, he has been outspoken on the evils of MNCs, corruption in corporates, and high usage of chemicals in consumer products. However, <a href="http://www.businessinsider.in/topic/Swami-Ramdev">Baba Ramdev</a> has no stake in the company.

Ramdev Baba's Patanjali Ayurved is now larger than Emami ! It's revenues for 2014-15 are a mind blowing Rs 2,500 cr

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There is a lot of money in the share market but not enough in your pocket

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Ramdev Baba's Patanjali Ayurved is now larger than Emami ! It's revenues for 2014-15 are a mind blowing Rs 2,500 cr

BI India Bureau

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