Rural-focused FMCG firms in sweet spot

Higher disposable income, price cuts to aid volume growth; Unilever, Dabur, Colgate, Emami among those to benefit more

Led by higher demand from rural markets, fast- moving consumer goods (FMCG) companies are expected to continue clocking double-digit growth in sales in the coming quarters. Rural sales of FMCG products rose 13 per cent year-on-year in the September quarter; urban sales grew only four per cent.
 
Overall volume growth for most FMCG companies have been in mid-single digit with Godrej Consumer and Emami clocking 9-10 per cent and a few (ITC, Colgate) seeing a fall in sales. Vikrant Oak and Sunil Jain of Quant Capital say rural demand had outpaced urban demand in the quarter on the back of consecutive good monsoons and increased availability of finance to farmers.
 
Rural markets account for more than a third of all consumer goods sold. Analysts say multiple catalysts will continue to help the rural segment to outperform. Motilal Oswal Securities (MOSL), for instance, expects rural disposable incomes to be higher, given two years of a normal monsoon, hikes in minimum support prices (MSPs), direct benefit transfers and farm loan waivers.
 

Source: Motilal Oswal Securities

The managements of many consumer companies, too, have indicated that rural growth is outpacing or matching urban growth, after many quarters of sluggish numbers. What could boost demand further, according to analysts, over the next year and a half are expected sops for the rural economy ahead of the 2019 general election.
 
Among Indian FMCG majors, Dabur, Colgate and Emami have the highest contribution from the rural segment to sales, at 45-50 per cent. Hindustan Unilever (HUL) also gets a significant chunk of its revenue from the hinterland.
 
The top rural bets for MOSL are HUL and Dabur. The brokerage believes that given its product portfolio, HUL, with the widest reach in rural India, will benefit from a revival in demand there. They expect the company to report an increase in operating profit margin, backed by volume growth, goods and services tax (GST)-led efficiencies and scale benefits. For Dabur, worries on the wholesale channel due to GST implementation and rural sales are receding faster than expected. There was de-stocking in the June quarter ahead of the GST implementation, due to uncertainty on tax treatment of stocks of finished products (inventories), which impacted the supply chain. This is expected to come back to normal gradually over the next couple of quarters.
 
Other triggers
 
The other trigger which will boost sales in both rural and urban India is the recent announcement by companies to effect price cuts after the revised rates of GST came into force. Analysts at Morgan Stanley say near-term pipeline inventory disruption notwithstanding, GST rate revisions are a positive for consumer companies. “We see an acceleration in volume growth, on the back of lower consumer prices and market share shift in favour of organised players, as well as an opportunity to further premiumise the portfolio, especially in categories like laundry, hair care and skin care,” the foreign brokerage adds.
 
Jyothi Laboratories, Gillette and GSK Consumer are key beneficiaries, as the products where the rates have been reduced account for 45-95 per cent of their sales. HUL remains the biggest beneficiary, as home and personal care products contribute to over 50 per cent of its overall revenue, say analysts at Morgan Stanley.
 
All these should also rub off well on the stock prices and valuations of FMCG companies. The S&P BSE FMCG index had fallen 12 per cent from its peak of 10,936 in early July in a little over a month to 9,714 on growth worries. But, since then, it has inched up, to 10,314 on Thursday.