By Nuvama Research
Rural FMCG demand will remain weak in Q3FY23. Granted, overall rainfall has been ample, but the metric discounts the deficit in 3-4 populous states and overall inflation remains a spot of bother. Lower-end of the rural job market seems upbeat, but still these are early days and sustainability is crucial. Due to favourable base, the extent of a y-o-y slowdown in rural is easing in Q3FY23; we expect market share gains among leaders (HUL/Britannia/Nestle) to continue. Foods will outperform personal care. First half (H1) will also see recovery after many quarters as seasonality was not abnormal. We expect y-o-y margins for the sector to remain under pressure in Q3FY23, with slight improvement q-o-q. Top picks are HUL, Britannia, Nestle and GCPL.
Is rural demand for FMCG out of the woods?
As per industry data, due to a favourable base, the extent of y-o-y slowdown in rural is easing in Q3FY23. In our view, this is almost entirely due to base effect as the rural slowdown started in H2FY22. Lower-end of the rural job market seems to be improving, but these are early days and sustainability is needed. General inflation and rainfall deficit in populous states like UP, Bihar, Bengal and Jharkhand remain key challenges. Grammage cuts are reversing in biscuits, soaps and more as costs are easing off – this will aid volume growth in FY24.
Rural India contributes about 36% to a typical consumer company’s sales and is an important focus area given a much lower per-capita consumption thereof. More importantly, it makes up roughly two–thirds of India’s population. Inflationary pressures pushed rural consumers to ration their consumption, which hurt volumes even in Q3FY23. The government is continuing to support the free food programme in CY23. This, along with MSP hikes, will better farm output; further, the likely cooling of inflation bodes well for FY24. Sops for rural consumers will likely remain high due to elections in many states and general elections in six quarters.
With start-up capital drying, we expect listed consumer players to dominate D2C. Q4FY23E onwards, base for rural FMCG demand will grow more favourable, and conceivably set real recovery in motion.