Indian economy

Monsoon, elections and Budget raise hopes of bonanza for India’s consumer goods companies

The biggest markets for FMCGs are small towns and villages, which have seen slackened demand in recent years.

Over 65% of Indians live in villages and small towns. This demographic, the biggest market for India’s consumer companies, is now dependent on the government’s generosity for a sustained demand recovery. The fate of corporate profits in the fast-moving consumer goods space is closely tied to the political will of the state and central governments ahead of key elections.

After three bad years, India’s hinterland showed some demand recovery between June and September 2017. FMCG volume growth here stood at 13% during that period, compared to a year earlier, and was higher than the 1% rise in urban India, according to market research firm Kantar Worldpanel.

The October-December quarter numbers will be a crucial indicator of the sustainability of this revival in demand.

Meanwhile, macroeconomic indicators are not very reassuring. Rural wages are still growing at a slow pace and farmers are still distressed about crop prices. Rural areas suffered two years of insufficient rainfall in the financial years 2015 and 2016. Then, in November 2016, came the note ban, which prompted households to cut back on discretionary spending.

But there are reasons to hope for better days.

Analysts anticipate government-led economic stimulus in the poll-bound states of Karnataka, Madhya Pradesh, and Rajasthan. Given that national elections will follow in 2019, political compulsions may force even the central government to put more money in the hands of the rural consumer.

“With a few state elections and expected populist budget, rural sector is anticipated to be the prime beneficiary. This, coupled with improving macros and good monsoon after two consecutive droughts, also augurs well,” HDFC Securities said in a report dated December 27. The report anticipates that “companies with a higher exposure to rural markets can surprise on growth.”

Then, there is the recovery in trade channels.

“Post-goods and services tax, volumes of consumer goods companies, which rebounded marginally from GST-related destocking in the second quarter of the financial year 2018, are likely to revert to near normalcy,” Abneesh Roy, research analyst at Edelweiss Securities, said in a research report dated January 5. “Rural market and CSD [the defence ministry’s canteen stores department] channels are recovering, albeit at a slower pace”

India’s rural markets, which were once high-growth drivers for companies selling sachets of shampoos, detergents, and hair oils, have continued to disappoint over the last few years. Large consumer goods makers extract between 40% and 50% of their sales from rural markets.

“Consumer demand has been steadily improving over the last few months,” Vivek Gambhir, managing director of Godrej Consumer Products, told The Economic Times. “We believe that as GDP growth gets better, it should lead to even stronger growth for FMCG in 2018. In particular, we expect a stronger bounceback in rural, while seeing continued improvement in urban demand as well.”

Analysts are also in consensus. “We will again see rural volume growth for most companies being better versus the urban demand and companies are also expanding on direct reach [in these markets],” Roy said in an interview on January 9.

All eyes are now on finance minister Arun Jaitley who will present Budget 2018 on February 1.

This article first appeared on Quartz.

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