Consumer stocks: Revival in rural economy to support earnings, valuation

Consumer companies with rural exposure such as Dabur, Emami, Hindustan Unilever (HUL), Marico and Godrej Consumer Products (GCPL) have got a positive response from analysts post-March 2018 quarter (Q4) results. The combined stock index of this pack is up 14 per cent since the beginning of FY19, double the 7 per cent rise in Sensex. Faster growth in rural business vis-a-vis urban, as seen in Q4, led by the revival in the rural economy, is a key reason. Analysts believe this trend is likely to sustain. 

In Q4, Dabur’s rural sales, for instance, grew 12.6 per cent versus 9.2 per cent for urban and that of Marico grew 12 per cent against its urban sales growth of 5 per cent. The above-mentioned companies earn 30-50 per cent of their domestic revenues from rural pockets. For GCPL, which gets a little less than 30 per cent of sales from rural India, its rural growth was 1.2-1.3 times of urban growth in FY18, as per Edelweiss Securities. With this, their overall top line grew by 6-12 per cent year-on-year in Q4. Management of most companies and analysts expect rural business to drive growth. 

“We expect government's spending plans to bolster rural development and raising of minimum support prices of crops to help regain momentum in rural demand in the medium term,” Marico’s management said.

With improving consumer sentiments, analysts expect earnings to grow at a healthy pace. Emami, which posted a 27.7 per cent year-on-year fall in net profit (others reported a growth) in Q4, is expected to return to profit growth with an uptick in rural demand. New product launches and sustained benefits from goods and services tax (GST), among others would aid earnings growth. 

A key monitorable, however, would be the input cost pressure as observed in Q4. Though companies like Dabur, HUL and GCPL, through effective cost savings, managed to expand operating profit margins by 150 to 200 basis point year-on-year, Emami and Marico saw margins fall 260-310 basis point. In some cases, though input prices have seen some softening recently.

While prospects look good, stock valuations (37-57 times FY19 earnings) are higher than their respective five-year average. Analysts, however, do not see any correction given the demand for defensive stocks, expected normal monsoon, elections and company-specific initiatives to sustain growth.