Mumbai: India’s largest consumer packaged goods firm Hindustan Unilever Ltd (HUL) said growth in rural India is yet to recover, highlighting the lingering, albeit fading, fallout of demonetisation and the crisis in agriculture.
In an investor presentation made to the Arisaig Consumer Symposium, HUL chief executive Sanjiv Mehta said that in 2016-17, growth in rural markets lagged that in urban ones for the first time since 2011-12.
There’s also been a steady fall in consumer sentiment since 2011-12, the presentation said, citing data from researcher Nielsen.
The problem has been exacerbated temporarily by the introduction of the goods and services tax (GST) on 1 July that resulted in so-called destocking. HUL said the early part of the quarter ending September 2017 “was affected..." but that trade channels were now improving while the wholesale channel was stabilizing.
In an earnings press briefing held in July, HUL had said that GST would continue to affect earnings in the coming quarters, Mint reported on 19 July.
According to the presentation, HUL’s net profit grew 6% and 8% in the quarters ending June and March, respectively, although profit was flat in the December 2016 quarter, when demonetisation, or the withdrawal of high-value currency notes, was announced.
India’s rural growth was expected to recover this fiscal year following 2016-17, when demonetisation hit rural spending, and two years of consecutive poor rainfall.
The agriculture ministry warned this week that the production of kharif or monsoon crops would be marginally lower this year than in the previous year. The difference could be because of the uneven distribution of rainfall from the south-west monsoon. Mint reported earlier this week that while the overall monsoon deficit was only 5%, 212 of the 630 districts in India had deficits of at least 20%, according to the weather office, while 100 had a surplus of at least 20%.
That’s probably being reflected in HUL’s sales. “The deficit in monsoons is the major reason for why there is lag in rural growth," an analyst with a domestic securities house said on condition of anonymity.
“For the near term, HUL’s management opined that consumer demand has broadly been in line with the recent trend and nowhere reflective of the strong retail-offtake revival that market research agencies have been suggesting," Richard Liu, executive director of institutional equities at JM Financial Ltd, said in a note dated 22 September, reporting on a call with HUL’s management. “The company maintains that rural demand recovery would be a more gradual affair."
HUL expects its earnings for the September quarter to be adversely affected by confusion among trade channels on how GST operates, he said.
There is reason to hope for a recovery in rural markets as both agricultural and non-agricultural wages have continued to grow over the past four years, according to data from the Centre for Monitoring Indian Economy.
“Rural growth will recover and again grow at double the urban growth rate, but...it is hard to say how soon this recovery will happen," added the analyst at the domestic securities house cited above.