Mumbai: Hopes of an earnings revival for fast-moving consumer goods (FMCG) firms are pinned on rural demand recovering after two tough years, even though macro indicators suggest continuing distress in the countryside.

Equities brokerages tracking FMCG firms say that with the effects of demonetisation and goods and services tax (GST) behind, and measures likely in the coming budget to boost rural spending, rural incomes could see a recovery, along with rising demand for consumer staples.

ICICI Securities expects the FMCG companies that it tracks to report an aggregate revenue growth of 14.8% in the December quarter from a year earlier, faster than the 5.2% recorded in the preceding quarter, analyst Anand Mour said in a 9 January note. “We believe the acceleration in revenue growth rate is largely attributable to a pick-up in consumer sentiment, gradual demand pick up in rural areas and also due to a lower base."

Kotak Institutional Equities said that while consumer firms will post “anywhere between solid and spectacular" performance for the December 2017 quarter, this may largely be due to the base effect of the December 2016 quarter, where demonetization led to a reduction in revenues and volumes for most FMCG firms. 

“If we had a choice, we would have preferred to not build/publish estimates for 3QFY18E, given the high margin of error induced by—(1) demonetization impact in the base quarter, (2) GST-related accounting changes, and (3) uncertainty on the degree of wholesale channel repair post GST," Rohit Chordia, executive director and lead analyst (consumer) at Kotak, said in a note dated 4 January, adding that the coming quarterly earnings will not be comparable year on year. 

For Hindustan Unilever Ltd, Kotak Institutional Equities estimated two-year compound annual growth rate in underlying volume growth to be around 3% for the December quarter. 

Brokerages say rural demand in 2018 will be spurred by recovery in rural trade channels (particularly wholesale) after reeling under the twin disruptions of demonetization in November 2016 and the GST implemented in July last year. Meanwhile, they say, the government is likely to introduce measures to increase spending on rural infrastructure and farmers’ wages during the upcoming budget, the last before the 2019 general election, said brokerage firm CLSA in a note dated 4 January. 

However, most macro indicators of the rural economy paint a dismal picture of jobs, wages and consumption.

Area under wheat cultivation fell 5% year-on-year between October 2017 and January 2018, as did area under oilseeds, as per data from the government, Mint reported on 9 January. 

Meanwhile, both farm and non-farm wages are at 10-year low growth rates, data from the RBI compiled by brokerage firm HDFC Securities shows. Both are growing at a CAGR of 6% as compared to 7-19% during 2004-2014, the data shows. 

“Non-agriculture wage growth rate has declined faster than agriculture wage growth during NDA government’s regime, reflecting labour-intensive sectors like infrastructure and real estate under stress," HDFC Securities said in a note dated 27 December. 

This indicates a deep distress among rural consumers that may not recover immediately enough to reflect in the earnings of FMCG firms. 

“Given where we are at the current economic situation, it is quite likely that there would be rural recovery if the appropriate set of reforms is introduced by the government. However, the recovery will be gradual and not in say one year," Anil Talreja, Partner, Deloitte India, said. “The cascading effect of reforms always takes time to reach the rural areas."

But the upcoming Budget may see key policy reforms that will at least jumpstart this growth, he said. 

“The finance minister has himself indicated that there is going to be a special focus on the rural sector as well as infrastructure in the upcoming Budget. A few areas that we can expect here – providing state of the art infrastructure to rural areas, warehousing facility, cold-storage for farmers and artisans to realise maximum potential from their produce," Talreja said, adding that the government should focus on direct benefits to the rural economy such as improving physical infrastructure and internet connectivity.