Markets
FMCG stocks face rural headwinds but bright spots offer hope
Summary
Bajaj Consumer Care Ltd, Dabur India Ltd and Emami Ltd have seen their shares fall 6-14% so far. mOn the other hand, Nestle India Ltd and Godrej Consumer Products Ltd (GCPL) have enjoyed gains of 5% and 11%, respectively.
The performance of stocks of fast-moving consumer goods (FMCG) companies have been mixed in 2023 so far. Bajaj Consumer Care Ltd, Dabur India Ltd and Emami Ltd have seen their shares fall 6-14% so far. On the other hand, Nestle India Ltd and Godrej Consumer Products Ltd (GCPL) have enjoyed gains of 5% and 11%, respectively.
A key factor for the difference in stock returns could be due to the companies’ varied levels of exposure to the rural markets. As the chart shows, Bajaj Consumer, Dabur and Emami derive about 45-50% of their sales from the rural areas. The rural sales split for GCPL and Nestle is at 25-28%.
Note that subdued rural demand is a worry for investors in FMCG stocks. Here, the uncertainty on monsoons adds to the discomfort. Dabur and Marico in their pre-quarter updates for the three months ended March (Q4FY23) highlighted muted rural sentiments. Dabur said demand across rural markets improved slightly in Q4 on a sequential basis but fell short of a full recovery. On the contrary, recently- released data by Bizom, a retail intelligence platform, showed that the rural areas’ sales growth of 16.8% year-on-year in the March quarter was ahead of the 7.9% rise in the urban market. Rural outperformance was driven by strong stocking across most product categories as well as some stock push for summer products at kirana stores, Bizom said. But Nuvama Research said the Bizom data pointing to a sharp recovery in rural FMCG doesn’t tie up with the brokerage’s findings. Nuvama, however, believes that the worst is likely behind for rural.
In general, analysts reckon that rural pain has likely bottomed out. “Q1FY24 onwards, the base for rural FMCG demand shall become more favourable," Nuvama said.
Given this, the commentary by FMCG firms on rural demand during Q4 results needs closer tracking. “With lowering inflation levels and the count of MGNREGA jobs in line with pre-covid levels, the worst appears to be behind for the rural economy. We expect to see more signs of an uptick in rural demand going ahead," said Alok Shah, an analyst at Ambit Capital. Improving rural fortunes would, in turn, aid volume growth at FMCG companies.
To be sure, investors would do well to closely track El Niño conditions this year, which may hit crop output. Jefferies India analysts said rural trends held up better in March.
“While weak summer rains/ crops are likely, we believe that rural economy is much more than agri," Jefferies India said in a 19 March report.
