Monsoon, GDP Perk Up Sentiment

Updated: Sep 30 2003, 05:30am hrs
A good monsoon this year has brought cheers to the growth-starved fast-moving consumer goods (FMCG) sector. Thanks to the economic growth indicators looking up, the FMCG sector is expected to post a growth rate of 5-10 per cent for the next six months ending March 31, 2004. The growth of this sector had slowed down in the last 2-3 years on account of a drought-like situation and a general slowdown in the economy.

Hindustan Lever Ltd (HLL) chairman MS Banga told FE: The mood in the economy is positive, and it is not just a flash in the pan.

There is certainly a feel-good factor in the FMCG industry. However, it will translate into better growth rates only December onwards. The general feel-good factor, good monsoon and expected high rate of GDP growth are the main reasons for the feel-good factor in the FMCG industry, said Godrej group chairman Adi Godrej.

Marico Industries chairman and managing director Harsh C Mariwala said, on the softer side, the monsoon has been quite good and appears even better on the background of last years drought.

Concurring on the view, Ashok Chhabra, executive director, Procter & Gamble India, said: We expect this years better-than-expected monsoon to boost the economy as a robust harvest should push up rural incomes and drive demand for FMCG.

Monsoon is the lifeline of the Indian economy as the agricultural sector accounts for 25 per cent of GDP and employs about seven of every 10 people in a country of more than a billion people. An NCAER study indicates 60 per cent of demand for consumer non-durables comes from rural areas, reasoned Mr Chhabra.

Growth in all segments of the Rs 80,000-crore FMCG industry is expected to accelerate, along with a considerable improvement in consumer spending, especially in rural India. Segments like soaps, toothpaste and other personal care products, along with beverages, are expected to perform well.

Industry analysts, however, differ about the exact time when the positive outcome will be visible in the FMCG sector. A fund manager from a public sector mutual fund said that guided by rural demand, there can be a pick-up in the December quarter. He is optimistic about the performances of HLL, ITC and Nestle.

Analysts said FMCG behemoth HLL is expected to post a topline growth in excess of five per cent for the September quarter over the same quarter last year. The company had reported a topline growth of 3.02 per cent to Rs 2,693.42 crore in the June quarter. However, a clear picture of the companys performance would emerge in the December quarter.

Tridib Pathak, equity fund manager at Principal Mutual Fund, felt that the results of the good monsoon will be visible only in the next financial year. SBI MF equity fund manager Sandip Sabharwal said that an upturn is expected in the December quarter, adding that things have started to look up in the last three months as is evident from a rise in stock prices.

Another analyst at a private sector mutual fund opines that the sectors performance will inch up gradually over the next two quarters, with per capita income playing a crucial role.

Mr Godrej who felt that the groups FMCG businesses are likely to grow faster than the industry rate said he expected the feel-good factor to continue for at least two more years.

One can expect the industry to post a growth rate in high single digit percentages (5-10 per cent) and there could be a few companies which would post a growth in excess of 10 per cent, said Mr Mariwala. He, however, said: On the hard factual side, results of FMCG companies for Q1 of FY 04 have been good and have appeared even better in comparison with the relatively poor show during FY Q1 2003. However, one has to be cautiously optimistic - should not conclude so soon that the feel-good factor is here to stay.

Marico is expected to continue to do well as it did in Q1 of FY04, he said. Even during the recession, which plagued the economy during the last two years, Marico had continued to grow with several consecutive quarters of year-on-year growth of 11 per cent in sales and 15 per cent in profits. We would not have the advantage of a poor performance during the previous year to reach a statistically superior growth rate this year, said Mr Mariwala.

While positive impact of the monsoon and revival in industrial activity are factors in favour of continuance of the feel-good scenario, there are issues like political stability, the impending elections, roadblocks for the economic reforms process, and Indo-Pak relations which could have a negative impact, if things do not go well on these fronts. One wonders whether the transformation from the earlier feel-bad factor to the current feel-good factor has been far too rapid and would, therefore, have to pass a sanity check from time-to-time. On the whole, macro-economic factors will decide whether the feel-good factor is here to stay, but chances are that it is here to stay, opined Mr Mariwala.

With the sector finally looking up, the industry needs to capitalise on the feel-good factor to build stronger relationships with the consumer through continued provision of enhanced value. Product innovations, and not short-term gimmicks, should be used as devices to improve bottomlines. The industry should not relax on the cost management front - all cost reduction drives taken up during the recession should be continued. In short, we should resist the temptation of being complacent because of the feel-good factor. Each company will have to draw up its own strategy. There cannot be a uniform recipe for all, said Mr Godrej.

There would be an improvement in the consumer spending, but with a time lag. Clearly, agricultural income will drive this directly in rural areas and indirectly in urban areas. All segments that have a higher value-added component will do well because there may be up trading. Also, urban products which address the aspirational needs of rural consumers would do well, provided they are offered at a reasonable price point, said Mr Mariwala.

In order to cash in on the upturn, manufacturers should focus on the four Ps (product, price, promotion, place) of marketing and concentrate on brand building, said an analyst.