India’s consumer goods majors will have to wait till the second half of the current financial year for a pick up in demand, benefiting from government measures to revive the rural economy and the likelihood of normal rains, said a report released on Monday.
The report by Mumbai-based brokerage firm Edelweiss suggested that volumes at the consumer staples firms will see an uptick in the second half of FY20.
“We estimate consumer staples’ volumes to perk up in H2 FY20 led by the NDA (National Democratic Alliance government) introducing stimuli to revive the rural economy; extension of the PM-Kisan scheme across farmers, as well as pension scheme for small traders to put money in the hands of consumers," Abneesh Roy, senior vice-president (research), Edelweiss Securities, said in the report
He added that the likelihood of a better-than-expected monsoon in the second half is also expected to shore up demand.
India is still gauging the impact of monsoons on which rural demand is largely hinged. The south west monsoon started late and was on a sluggish note earlier this month, but rains are expected to strengthen in August and September, according to the India Meteorological Department Edelweiss said that monsoon remains a key variable as forecasts so far have indicated the likelihood of El Nino in the first half of the monsoon season. “However, a strong second half may be able to compensate for the loss," the report added.
Volume growth in the first quarter of FY20 is likely to remain soft: “We estimate soft volume growth for most consumer goods companies in Q1 FY20....high base of Q1 FY19 will also play a role in the same," it noted.
The report said rural growth—that is still treading ahead of urban—is likely to further slow down before it accelerates again, slipping from 1.15 times urban growth to grow at par with urban markets. Across sectors, such as automobiles and consumer goods, companies have been reporting subdued demand. This was especially pronounced in the fourth quarter of FY19, as a slow offtake of goods in rural markets and a prolonged winter saw fast-moving consumer goods companies report moderate volume growth.
“Seasonal pangs, liquidity tightening and soft macros added fuel to fire, exacting toll on volume growth," the report added.
For the quarter ended 31 March, 2019, Hindustan Unilever, India’s largest consumer goods firm, reported 7% volume growth—ahead of its peers, but its lowest in six quarters. Godrej Consumer Products posted a mere 1% increase in domestic volumes, while Dabur India Ltd did slightly better at 4.3%.
Companies said they are waiting for a strong monsoon. Biscuit maker Parle Products said it will wait till the end of July to watch for any uptick in demand. “The trend of the slowdown will persist till the end of monsoon, once you have good rains then propensity to spend will increase," said Mayank Shah, category head, Parle Products, which draws over 50% of its sales from the hinterland.
The newly-formed NDA government is set to announce its first full budget on 5 July. “The immediate move will be to expand stimuli, especially in rural areas," the report said.