IMD's drought forecast gives India Inc jitters

The India Meteorological Department (IMD)’s announcement of drought-like conditions developing in several parts of the country couldn’t have come at a worse time, especially with India Inc grappling with a slowing economy and low investor and consumer sentiment.

IMD also said the El Niño weather phenomenon was likely to reduce rains in the second half of the monsoon season this year (August-September). Thus, any hopes of a pick-up in rainfall after deficient rains in June and July have been put to rest.

For India Inc, the news is worrisome. R S Sodhi, managing director, Gujarat Cooperative Milk Marketing Federation, which markets the Amul brand of milk and dairy products in the country, says, “A good monsoon impacts rural incomes and, therefore, rural consumption. With a drought, the crop output would be hit, impacting rural demand.” A Mahendran, managing director, Godrej Consumer Products, says, “There is no denying the impact of a weak rainfall on rural areas. It is certainly not good.”

HEADED FOR A DRY SPELL

• India Inc already grappling with slowing economy, low investor sentiment
• With a drought, crop output would be hit, impacting rural demand
• With deficient rains, growth in rural FMCG sales could fall to 10-11%
• Rural sales account for 40% to an auto company’s sales. This could be hit

While results of most fast-moving consumer goods (FMCG) companies for the quarter ended June have been good, with an average profit growth of about 20 per cent, the impact of a drought is likely to show in the second half of the year. Harsh Mariwala, chairman & managing director, Marico, says, “There will be an impact, but with a lag effect.”

Thanks to inflationary pressures, sales in rural areas have seen a deceleration in the last few months, with growth rates of about 12-13 per cent. With deficient rainfall, growth in these sales could further decline to 10-11 per cent, analysts say.

FMCG companies are also bracing up for a rise in downtrading in the wake of falling incomes and high inflation.

CavinCare’s chairman & managing director C K Ranganathan says in such a scenario, the focus couldn’t be on premium products. “You cannot have a premiumisation strategy when consumers are battling inflation and uneven rainfall threatens to reduce rural incomes. The focus would be mass, because you have to catch consumers who are trading down. They cannot be ignored.”

Companies such as Hindustan Unilever, for instance, have increased their regional focus with brands such as Ruby Tea in the South and region-specific soaps.

Tata Global Beverages is also aggressively pushing its tea products in rural channels, offering economical packs to drive consumption. In the automobile sector, companies are assessing the impact of a drought on rural sales. “It is difficult to quantify the impact, but it will be there for sure if the monsoon fails,” says Bishwambhar Mishra, chief executive (tractor & farm mechanisation), Mahindra & Mahindra. “While 50 per cent of farming in India has irrigation facilities, the other half is dependent on the monsoon. So, there would be an impact,” he added. Experts say in volume terms, rural sales contribute 40 per cent to an automobile company’s sales, and this figure has risen in the last few years.