Rural recovery is expected to take one more quarter before it shows any signs of improvement. Deficit rainfall in four major states of Uttar Pradesh, Bihar, West Bengal and Jharkhand, along with high inflation is expected to keep rural volumes subdued in the third quarter ended December as well.
While lower end of rural job market seems to be improving, the demand needs to remain firm on a sustained basis. However, with costs easing off, reversal in grammage cuts have begun in biscuits, soaps and some other products which is expected to aid volume growth in financial year 2023-2024.
Inflation topping the growth in rural wages impacted FMCG companies like Hindustan Unilever, Dabur India, Adani Wilmar, Tata Consumer Products and Marico for the first six months of April-September 2022. Rural markets, account for nearly 40% of the FMCG industry’s volumes which was pinning hopes on some recovery in the second half of the fiscal on the back of good harvest, monsoon and higher minimum support prices.
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While, monsoons have been good in majority states, four crucial states which drive rural demand have seen a rain shortfall, which is impacting recovery. “Currently we have not picked up on any significant signs of an uptick in rural FMCG demand. Although, overall monsoon was good, but headline data hides the deficit in four high-population states,” analysts at Nuvama Institutional Equities (erstwhile Edelweiss Securities) said on Monday.
In addition, inflation continued to impact consumption in the rural areas. “Inflationary pressures pushed rural consumers to ration their consumption, which hurt volumes even in Q3FY23,” they said.
Sanjiv Mehta, CEO and managing director, Hindustan Unilever (HUL) had said in an analyst conference post the company’s July-September earnings, that rural inflation was higher than urban, and volume decline was more pronounced in rural given that people with lower income levels felt the pinch on their wallets much more. “FMCG market context has not changed significantly this (September) quarter and continues to remain challenging,” he said.
At Dabur India, where sales from rural markets account for nearly 50% of its total sales had also reported muted growth from the hinterland in the September quarter, after five quarters of no major impact. “We have seen credit pressures, liquidity pressures coming in the rural business, and more so in the rural heartland of Dabur which is more UP and Bihar, where the problem got exacerbated due to monsoon being patchy in these states,” said Mohit Malhotra, CEO, Dabur India during post earnings analyst call.
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Similarly, Marico said that the divergence in rural and urban growth grew starker with the former reeling under persistent inflationary and liquidity pressures. It was reflective in company’s de-growth in volumes for Parachute oil due to muted consumption trends and sluggishness in loose to branded conversions while premium hair oils fared better.
However, government’s continued support to the free food programme in calendar year 2023, along with MSP (minimum support price) hikes, are expected to better farm output. Also, the likely cooling off inflation bodes well for FY24, and should aid in volumes as companies start reversing some of the steep grammage cuts.
“Impact of high inflation in fertiliser, diesel costs could ease off aided by government tax cuts and easing commodities, which could be a positive development in coming quarters…Sops for rural consumers will likely remain high due to elections in many states and general elections in six quarters,” analysts at Nuvama said.