For the last few years, the surge in agri business and rural sales has been the driving factor of future growth potential of FMCG businesses in India. Rural contributes 35-40 percent of overall sales value.
While the September quarter results of ITC met street expectations, that of fellow FMCG giant Hindustan Unilever marginally beat expectations. Both companies can thank their rural customers for the fillip.
The sales of ITC grew by 15.4 percent and that of HUL by 10 percent during the September 2018 quarter.
For the last few years, the surge in agribusiness and rural sales has been the driving factor of the future growth potential of FMCG businesses in India. Rural contributes 35-40 percent of overall sales value.
Rural segment growth is on the radar of analysts in assessing the roadmap of ITC and HUL in India. HUL operates in three segments of Homecare, beauty care, and foods solutions business. Of this, the home care and beauty care products are widely distributed in rural and semi-rural areas too, given the rising youth lifestyle aspirations of rural India.
“Rural growth continues to grow ahead of its urban counterparts. So, we certainly believe that it has the potential to grow much faster,” said Sanjiv Mehta, Chairman and Managing Director, HUL.
The key verticals of its peer ITC are cigarettes, FMCG, hotels, agri, and paper. ITC through its e-choupals and associated distribution reaches out to rural areas with its agri and FMCG products.
As per brokerage Prabhudas Lilladhar, HUL has reportedly grown its rural business 1.2 times of its urban growth.
This could also be on part of lower current comparison base in rural consumption. The reports suggest that in the past quarter rural growth was 1.5 times urban growth.
The report also suggests that ITC’s agri and FMCG business growing around 13 percent with a recovery in rural consumption.
The ITC management has highlighted a stable demand environment with visible signs of recovery, especially in the rural markets. Analysts expect cigarette volumes to recover driven by a recovery in rural consumption which forms two-thirds of smokers.
For other players in the sector too, the rural market has played an important role. For Dabur in the second quarter of Q2, the rural growth has been higher than urban by 3-4 percent, as per management.
The rural markets were impacted on the downside during demonetisation and GST implementation due to the large informal sector in rural areas. As per Nielsen report issued in August 2018, after GST implementation, supply chain inefficiencies have been ironed out and this will help in rural supplies. Thus, consumption in rural areas will depend largely on current inflation and rural income.
IMPROVING RURAL CONSUMPTION
The government intends to double farm income by 2022 through the increased budget allocation in water and electricity and also raising the Minimum Support Price or MSP to agricultural produce. This bodes well through demand pick up for large FMCGs like HUL and ITC that already have a vast rural distribution network in place.
Nielsen report states that post GST implementation, the price advantage of the informal sector will go down that will help branded FMCGs ITC, HUL and the like to compete on equal footing.
“The rural segment continued to grow faster at 1.2-1.25x for FMCG companies but still remains lower than historical levels,” according to ICICI Direct Research.Analyst estimates are that future growth of FMCG would be more in rural areas with nearly 3 times of urban growth. However, it remains an overall balanced picture for rural consumption due to its large dependence on monsoon recorded at 92 percent for all Indian basis as per Skymet estimates.