Sector Update: FMCG

Sector Update: FMCG

The cumulative rainfall received by the country as a whole during the period 1 June, 2009 to 12 August, 2009 was 29% below the long-period average (LPA; the rainfall is poor compared with that in FY2003, when the monsoon rains had been 24% below the LPA).

Since most of the crop sowing ends in July, the August-September rains (ie the follow-up rains) would be crucial in determining the country’s agricultural production this year.

The rainfall deficiency in the August-September period will not only affect the farm yield but also result in crop failure. This would adversely affect the net income of the rural population on account of the resultant higher spends on seeds, fertilisers and pesticides.

Hence, the steep fall in the rural income could affect the demand for the fast moving consumer goods (FMCG).

The agricultural and rural focus of the Union Budget FY2009-10 and the increase in allocations under various schemes augur well for the rural income.

The allocation under the National Rural Employment Guarantee Scheme increased by 144% to Rs391,00 crore in 2009-10.

This along with the higher minimum support prices (MSPs) for farm produce and the adequate rainfall for four consecutive years till 2008 limits the downside risk to rural consumption.

FMCG companies with large rural exposure could witness some slowdown in their top line growth. For instance, Hindustan Unilever Ltd (HUL) and Godrej Consumer Products Ltd (GCPL) could experience some slowdown in the sales as the rural markets contribute around 45% and 38% respectively to their total turnover.