New Delhi: Consumer goods companies that reported weak volume growth in the fourth quarter of the last financial year will report mid-single digit volume growth in the June quarter as well, hit by weak rural demand and disruption in wholesale trade during India’s recently concluded general elections.

“We expect the consumer sector to see yet another weak quarter led by muted rural demand and some impact of trade disruptions due to elections," brokerage Jefferies India said in a consumer staples earnings preview note on 3 July. “Last year's high base is also likely to hurt volume growth," Varun Lohchab, equity analyst, Jefferies India said in the note. While non-food input costs are benign, low top-line growth resulting in negative operating leverage should limit margin expansion, the note added.

Some of India’s largest consumer goods firms that sell soaps, shampoos, detergents and packaged foods have reported a slowdown demand in rural markets.

Though rural growth continues to be ahead of urban, it has slowed down over the past few quarters. Rural growth multiplier to urban growth has come down to 1x from 1.3x in Q3FY19, Jefferies noted, adding that urban demand trends, however, have been largely stable.

As a result, for the quarter ended 31 March, 2019, Hindustan Unilever, India’s largest listed packaged consumer goods firm, reported 7% volume growth —ahead of its peers, but its lowest in six quarters. Godrej Consumer Products (GCPL) reported a 1% increase in domestic volumes, while Dabur India Ltd did slightly better at 4.3%.

“Like in previous quarter, staples continue to see impact of slow rural off takes and disruption caused in wholesale trade due to elections," Jefferies said. The staples sector is also lapping up another high base quarter when volumes were above trend, it added.

Jefferies has pegged volume growth for companies such as Hindustan Unilever, Dabur and Marico at 5%, 4%, and 7%, respectively, for Q1FY20. Nestle, the note added, is expected to clock 11% growth in domestic sales led by 7% volume growth. However, it expects

Emami and GCPL to report low to mid-single digit growth. Tobacco to consumer goods major ITC Ltd is expected to post 9% growth in sales.

Consumer goods firms await better monsoon rains, and the newly-formed government’s annual Budget—to be announced tomorrow—to see an uptick in rural demand.

In a recent interview with Mint, Dabur India’s chief executive officer, Mohit Malhotra, said a better monsoon could help push demand in the second half the current financial year. “If the monsoon is good then demand should revive. If the monsoon is patchy then there could be a concern. But if the monsoon is all right then I think the second half of the year should be reasonably okay. It also depends on what the budget brings to the table for the rural consumer. So, the budget and the monsoons are the two variables."

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