Monsoon is expected to be normal this year, the IMD said. | Representative image (Source: Reuters)
As the monsoon advances rapidly into many parts of the country and several areas witness the first showers of the season, corporate India is hopeful that consumption would also revive.
The season has begun well, with rainfall since June 1 being 21 percent above normal. The India Meteorological Department and private forecaster Skymet have forecast normal rainfall this year, which bodes well for the rural economy.
Companies expect that higher rural income after a good harvest will boost demand for consumer goods, two-wheelers, and tractors.
"If Met predictions are to be believed, normal and evenly spread rains may bring an early respite for the rural economy thus pushing demand for vehicles faster than expected," the Federation of Automobile Dealers Association said in a statement. (Read here: Automobile retail sales crash 55% in May but strong demand recovery in June so far)
FMCG players such as ITC, Jyothy Labs, and Parle Products are all prepped up to tap this demand and have been focusing on increasing their penetration in rural areas of late.
According to experts, the demand for tractors is most likely to grow 5-8 percent this financial year after record sales in FY21.
Experts are, however, sound a note of caution for two-wheelers and FMCG goods, as the impact of the second wave in the hinterlands of the country might impact their sales.
FMCG gears up
Even as the second wave of COVID-19 disrupts the supply of products in rural regions, consumer goods companies are positive that the monsoon would bring back on track rural consumption.
“We are expecting the rural consumers to have a good harvest season and thereby see an increase in their disposable income. Given the raging pandemic that the hinterlands continue to battle, a good monsoon season would bring in some much-needed respite from the turmoil and manage to lift consumer sentiments and spending,” said Krishnarao Buddha, Senior Category Head at Parle Products.
In anticipation of a spike in demand, ITC is driving distribution penetration into rural India. It has planned a multi-layered strategy to reach rural areas through a hub-and-spoke model of wholesale dealers and rural stockists, who are aided by a wide of network travelling salesmen. (Read here:In strategic shift from tobacco, FMCG now increasingly powering ITC’s growth)
“Our outlook on rural consumption remains robust given the headroom available for growth though there may be some impact in the immediate short term due to the COVID-led disruptions,” said an ITC spokesperson.
Besides the monsoon, companies expect the recent government initiatives would also help.
“The recent announcement by the prime minister that food grains will be given free till Diwali to more than 80 crore beneficiaries will have a positive impact on demand for non-food products in the FMCG segment,” said Ullas Kamath, Joint Managing Director, Jyothy Labs.
Auto in a wait-and-watch mode
For the two-wheeler sector, the rural markets generate little more than half of domestic sales. Due to lockdowns in more than 20 states, two-wheeler showrooms could not operate. Sales have resumed with the gradual lifting of restrictions, but the initial level of enquiries and sales have been below expectation.
“We are yet to see the theory of pent-up demand take effect. Yes, we were expecting a strong surge in consumer interest given the thrust on personal mobility but that has not translated to actual sales. But then again, these are early days into the unlocking and buyers don’t even know if the showrooms are open,” said a prominent two-wheeler dealer of Hero MotoCorp from Maharashtra.
“Monsoon does play a vital role in the rural economy but due to last year’s bountiful rains, the reservoirs were at levels better than most of the previous years. This has led to good harvest income so far. This year’s monsoon is predicted to be normal and this should ideally translate to favourable demand. But we are keeping a watch on the COVID-19 situation too,” said a sales executive of one of India’s top four two-wheeler makers.
Tractors, meanwhile, are expected to have another good year.
“Tractor volumes were above estimates in May on a pick-up in retails toward the end of the month and channel filling”, stated an Emkay Global report.
According to a report from Kotak Institutional Equities, a bumper Rabi harvest, record procurement, food prices holding up, gradual opening up of mandis, and expectations of a normal monsoon should support tractor demand.
Experts, however, are cautious in their outlook ahead given that the pandemic has reached hinterlands too.
“Although the second wave is receding now, the impact of the spread of the virus on sowing, employment as well as savings cannot be ignored. This can affect the harvest and the ensuing propensity to consume during the harvest-cum-festive season,” said Advaita Tawde, Lead Analyst, CARE Ratings.
The demand for packaged foods and hygiene products may be favourable, said Tawde, but it is unlikely to pick up sharply.
Last month, India Ratings made similar projections.
“While demand for agricultural credit and agricultural inputs such as fertilizer and pesticides could remain strong given third consecutive year of near-normal monsoon, the demand for FMCG products, automobiles especially tractors and two-wheelers is expected to suffer," it said.
India Ratings expects rural demand to remain muted.
However, some are betting on the pent-up demand effect to come into play.
“While discretionary might take a hit on the rural side but it will get balanced out because of the pent-up demand,” says said Vinit Bolinjkar, Head of Research, Ventura Securities Ltd.
Bolinjkar said consumers in rural areas have amassed savings over the last two years, which might be spent in the coming quarters.
“With the harvest season being good, the rural economy should bounce back around the third quarter, if not the second quarter,” he added.
The infrastructure industry is also optimistic about recovery going ahead.
R S Sharma, managing director of JSPL told Moneycontrol: “Steel demand is increasing domestically as states are unlocking from lockdown, which is not much impacted from monsoon”.
Anil Singhvi, Executive Chairman of Digvijay Cement, said this year's cement demand was likely to be better than last year’s, as the segment is expecting good traction as the states start to unlock.(With inputs from Devika Singh, Swaraj Baggonkar and Tarun Sharma)