Smaller government allocation for rural schemes and elevated inflation could weigh on sales growth at consumer-oriented companies, including makers of fast moving consumer goods (FMCG) and discretionary products.
The allocation for core rural sector schemes in Budget 2023-24 is down 16% over the revised estimates for FY23; adjusted for food subsidies, the fall is 6%. In absolute terms, the budgeted allocation has come off from `8.5 trillion in FY21 to `5.4 trillion in FY24. Support for rural programmes had held up consumption during the pandemic.
Analysts say the weak rural sales growth since the March 2022 quarter may result in optically better growth from the March 2023 quarter, but demand is muted and consumers are downtrading.
Rural FMCG volumes contracted 2.8% y-o-y in the October-December period, while urban volumes grew 1.6% y-o-y, data from Nielsen showed. On-the-ground demand in the hinterland is still badly affected by inflationary pressures. Net financial savings of households are estimated to have fallen to a three-decade low of about 4% of GDP in H1FY23 from 7.3% in FY22, suggesting savings boosted consumption.
The Hindustan Unilever management said after the Q3FY23 results announcement that there were signs of the rural slowdown bottoming out, possibly led by inflation peaking, strong winter crop sowing and an improvement in farm incomes. Average real rural wages, at 2018 prices, were lower in October 2022 than in January, having dropped to sub-`300 levels. Real rural wages contracted 11 months in a row to October.
So far, most results for Q3FY23 have been ordinary or disappointing, except for Britannia and Westlife Foods. At Dabur, for instance, volumes contracted 3% y-o-y in the domestic business with the three-year compounded annual growth rate (CAGR) in revenues decelerating across most categories. “High rural salience and the resultant marked downtrading stunted the company’s growth,” analysts noted. Rural growth lagged urban growth for the second consecutive quarter. Colgate reported a low single-digit volume fall y-o-y for the fourth consecutive quarter in Q3FY22. Analysts attributed this to the weak demand in rural markets, which contribute around 40% of Colgate’s revenues.
Marico posted underlying volume growth of 4% in the domestic business. On a three-year CAGR basis, quarterly domestic volume growth stood at 6%. The management said in a release that general trade had seen a mid-single digit decline with the rural segment still behind urban. Asian Paints reported flat y-o-y volumes and a contraction of 7-8% (excluding putty); inflation-led downtrading resulted in subdued revenue growth.
Not only rural, but urban demand has also been flagging, say analysts, pointing to a deceleration after the festive season. At Jubilant Foodworks, for example, business was dull in November, though it picked up somewhat in December. This was reflected in the Q3FY23 numbers, which saw a deceleration in revenues. Whirlpool’s Q3FY23 results came in way below estimates with the management attributing the weakness partly to muted demand. Crompton Greaves (ex-Butterfly) reported a fall in revenues of 10% y-o-y as festive demand remained muted.