Despite monsoon worries, FMCG firms see pick in rural demand by year-end

While lower sowing is a cause of worry, the government's decision to offer an increase in MSP may help the farmers boost their income and hence, their spending capacity

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Despite an errant monsoon so far, which could possibly worsen rural consumption market further, fast moving consumer goods (FMCG) companies are upbeat that signs of recovery in these markets may be seen in the next 6-9 months.

For companies like Hindustan Unilever (HUL), which has a varied portfolio, rural India accounts for around 30-35 per cent of its sales while Emami Ltd’s dependence on rural sales is as high as around 50 per cent. Eveready India, on the other hand, has a strong rural presence with its flashlights and batteries portfolio. Other enterprises like Marico or paints companies like Asian Paints or Berger Paints also have a balanced rural portfolio.

Even as Care Ratings is of the view that the current progress in monsoon continues to be slow with almost 60 per cent of the metrological sub-divisions in the country experiencing below normal rainfall, industry officials are upbeat about the monsoon trends. 

“The monsoon has just started and the forecast for monsoon continues to remain near normal. So, I don’t think we should be feeling there is going to be a monsoon deficit and so something may or may not happen. I think we should stick to the forecast”, Shiva Krishnamurthy, vice president of tea and food at HUL said.

However, Care Ratings noted that total foodgrains recorded a sowing of 303.7 lakh hectares which is 57 lakh hectares lower than the normal of the corresponding week. Also the sowing in the current season has been 34.5 lakh hectares lower than corresponding period year ago.

While lower sowing is a cause of worry, which can stress farmers’ income, the government’s decision to offer an increase in the minimum support prices (MSP) may help the farmers boost their income and hence, their spending capacity. MSP, for most of the kharif crops has risen around 50 per cent over cost while for bajra, the increase is 85 per cent.

“The biggest cause of worry for rural markets is delay in monsoon, but it has picked up in July. The government also wants to boost consumption and I think in the next 6-9 months, we may see a recovery in rural demand”, Amritanshu Khaitan, managing director at Eveready Industries said.

This coincides with the onset of the festive season as well when discretionary spends usually scale up.

The ratings agency is of the view that for the period from June 1 to July 24, only the western belt of Maharashtra, parts of Uttar Pradesh and Punjab and the North-East, besides the island regions of Lakshadweep and Andaman & Nicobar have received normal rainfall.

Industry executives also note that the paints sector, besides foods and other consumer goods vertical, is expected to post robust volume growth led by strong repainting demand from construction. 

“Growth in the repainting segment, accounting for about 90 per cent of decorative demand, is on account of good demand in rural and small towns”, Abneesh Roy, executive vice president of institutional equities at Edelweiss Research said.

Industry officials are of the view that the government massively slashed its expenditure to manage fiscal deficit, which triggered deceleration in the rural economy. 

Moreover, direct transfer schemes of central as well as state governments took a hit with the setting in of the model code of conduct during the elections this year and the PM-Kisan scheme’s limited beneficiary list. 

Seasonal pangs, liquidity tightening and soft macros added fuel to fire, exacting toll on volume growth.

Moreover, Edelweiss stated that rural wage growth has been weak for quite some time now and cited slowdown in the real estate industry, which is among the largest employer of unskilled labourers in India, as a potential factor. 

According to this broking agency, construction activity in the property market was among the worst hit post demonetisation. This apart, overall private capital expenditure has remained subdued, which has also been hindering wage growth. 

The other reason was subdued food inflation which, however, is picking up now.

  • Higher MSPs can potentially increase farmer’s income to spur recovery
  • Retail inflation in the food components for June has risen to 13-months high which will increase rural income
  • Rate cuts expected to boost discretionary spends 
  • Almost 60 per cent of total meteorological sub-divisions continued to receive below normal rainfall