India's consumer goods sector longs for a rural revival

FMCG companies have been taking a slew of measures to push up rural demand over the past few quarters. (Photo: Mint)
FMCG companies have been taking a slew of measures to push up rural demand over the past few quarters. (Photo: Mint)


A prolonged rural slowdown is dragging demand for packaged consumer goods. A revival later this year depends on monsoons and post-election government spending

Spending in rural India has failed to revive for months, burdened by high inflation, a poor monsoon season, and subdued growth in wages. That’s making companies in the fast-moving consumer goods (FMCG) sector lose their sleep: they rely on rural demand for 30-50% of their sales. 

Analysts monitoring the segment are also sounding the alarm, with NielsenIQ predicting a growth of 4.5-6.5% in value terms in 2024, sharply weaker than 9.3% in 2023.

The impact has already shown up in the earnings for the December-ended quarter. Revenues of BSE-listed FMCG firms grew just 4.3% year-on-year, the slowest in three quarters. Profit growth picked up due to falling input costs, but at 5.8%, looked pale against the 21.7% growth just four quarters ago. 

In terms of volumes, growth has remained muted as rural demand is yet to pick up, said Kaustubh Pawaskar, deputy vice president, fundamental research, at brokerage firm Sharekhan.

Meanwhile, some companies are managing to keep their heads above water by passing on the benefits of the relief in input costs. 

“FMCG companies have been taking a slew of measures to push up rural demand over the past few quarters," said Amnish Aggarwal, director, institutional research, at Prabhudas Lilladher. “Companies have cut prices in select categories, and have tried to improve their direct rural reach and distribution, thus providing a better assortment of products available to rural consumers."

Earnings undertone

Unsurprisingly, the worries of the rural slowdown have dominated the earnings discourse. During December-quarter earnings calls, many major FMCG companies highlighted a subdued recovery in rural demand but also expressed optimism around a gradual recovery. Some key players, such as Hindustan Unilever Ltd (HUL), emphasized on the resilience of rural demand even as they acknowledged the stress it was under.

A few FMCG companies recorded high volume growth due to a low-base effect from a year ago, but growth over a longer time horizon was muted: HUL and Marico pointed to a low single-digit annual growth averaged over a two- and four-year period, respectively.

Meanwhile, data from analytics firm Kantar showed that overall volume growth had increased to 5.2% in the December quarter from 2.1% in the year-ago period, but as compared to the preceding quarter, the pace was slower. 

“The mild slowdown that we saw in the September quarter became even more pronounced in the October-December period," said K. Ramakrishnan, managing director, South Asia, at Kantar Worldpanel.

A further split showed that volume growth in FMCG products in the urban market (5.6%) outpaced volume growth in rural areas (4.8%). (However, the gap between the two has significantly narrowed over the past year, pointing towards the prospects of a gradual recovery.)

To lift volume growth, companies are targeting new products for mass consumption in rural markets apart from ramping up their rural distribution to compete with local players offering low-priced products. While many companies reaped the benefit of passing low input costs to customers, analysts cautioned that this may not sustain in the long run.

“I don't think it can sustain because the volume has to show improvement and such price pass-on measures are not working for a few companies," said Vincent K.A., research analyst at Geojit Financial Services.

Recovery underway?

Persistently high retail inflation has significantly hurt consumer sentiment over the last two years. In all but five months in this period, price increases in rural areas have consistently surpassed that in urban areas, and have also outpaced rural wage growth. Rural demand has also been affected by uneven and erratic rainfall, which has severely hurt kharif crop yields, and hence rural incomes.

This has also dented investors’ sentiment of late, as the pack of FMCG companies has started to languish on the stock market after a stellar year-long run in which they outperformed the 30-share blue-chip index. In 2024 so far, the FMCG index on the BSE has fallen 6.1%, while the Sensex is up 2%, as compared to gains of 27.3% and 18.7%, respectively, in 2023.

Moving forward, a sudden turnaround is not on the cards, and the rural segment is likely to revive only gradually, Geojit’s Vincent said. The upcoming general election season, which is likely to boost spending, and winter crop output will be crucial to the process of rural recovery. 

“The second half of 2024-25 could give us a clearer picture in terms of how the demand revival is being observed in the rural market," said Sharekhan’s Pawaskar.

Analysts expect a better monsoon, coupled with post-election government incentives and policies to also play a role in boosting rural recovery. 

“From the broader perspective, if the sectoral volume growth rates have to go to a mid- to high-single-digit kind of a number, rural demand recovery has to kick in and again start growing faster than urban demand," Aggarwal said.

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