How Modi’s coalition government could propel FMCG companies

While the Modi 2.0 government has already laid the groundwork for battery-driven vehicles by implementing policies such as FAME 2, EV manufacturing Policy PLI schemes, the new government is likely to reinforce its image as the one that is promoting carbon neutralit

Analysts foresee a potential boon for the consumer sector, particularly for FMCG or fast-moving consumer goods companies, against the backdrop of the evolving landscape of coalition politics. With nudges from allies TDP or Telugu Desam Party and the Janata Dal United or JD(U), heightened social sector spending is anticipated under Narendra Modi's third term as prime minister. This, coupled with possible announcements in the Union budget, is expected to fuel top-line expansion across the segment, according to industry executives.

"Demand appears more promising now. Rural areas have been showing signs of recovery over the past four to six months, and the recent election results are likely to further enhance this trend. Stock market movements reflect growing optimism for companies catering to rural markets. Additionally, the anticipated favourable monsoon this year is poised to further bolster consumption," said Anand Agarwal, the CFO of V-Mart Retail, which runs the eponymous chain of retail stores.

FMCG companies are banking on a gradual revival in rural demand in 2024, as indicated by a February 2024 report from Centre for Monitoring Indian Economy (CMIE). The report cites ongoing government spending, price adjustments and an improving macroeconomic environment as key drivers.

The election outcome suggests a potential shift in the new government's focus towards the social sector, potentially empowering lower-income demographics and augmenting their purchasing power.

"Many FMCG companies have grappled with subdued rural demand over the past year, attributed to lower disposable incomes and inflationary pressures. Increased allocations towards the social sector could reinvigorate these segments and stimulate higher consumer spending," observed Ajay Thakur, research analyst (FMCG) at Anand Rathi Shares and Stock Brokers.

However, analysts caution that while such initiatives may stimulate consumption, variables such as the upcoming budget and monsoon projections will significantly shape consumer sentiment. The interim budget's emphasis on capital expenditure and initiatives like the Pradhan Mantri Matsya Sampada Yojana announced in 2019 to kickstart a Blue Revolution in the fisheries sector underscore the government's commitment to bolstering purchasing power and employment prospects, with a target of creating 5.5 million jobs and putting money in farmers' pockets.

"Previously, the focus primarily rested on long-term nation-building through infrastructure and capital expenditure. However, there's now a pressing need to address rural consumption and income generation, which, in turn, could fuel employment opportunities and spur rural demand," highlighted finance chief of V-Mart Retail, which predominantly operates in tier II and III towns and cities.

Madan Sabnavis, chief economist at Bank of Baroda, pointed out the "collateral benefit" of increased social spending, noting that it redirects resources towards consumption that would otherwise have been allocated elsewhere.

Tailwinds

Anticipated above-normal rainfall in FY25, forecast at 106 percent of the long-period average by the India Meteorological Department, is expected to provide a much-needed boost to rural growth. Preeyam Tolia, research analyst specialising in FMCG and retail at Axis Securities, views Modi 3.0's populist measures as complementary to existing tailwinds propelling rural growth.

Tolia predicts mid-to-high single-digit topline growth for FMCG companies in FY25, buoyed by various factors including faster rural growth compared to urban markets, stable inflation, and a favorable outlook for crude oil prices.

Emkay Global Financial Services echoes this sentiment, forecasting high-single-digit FMCG growth for FY25.

While increased social spending holds promise for stimulating consumer demand, its implications for corporates necessitate scrutiny. Sabnavis highlights challenges such as wage standardization across industries, as exemplified by the National Rural Employment Guarantee Act (NREGA), which may lead to heightened labor costs without commensurate gains in productivity.