Shares of fast-moving consumer goods and automobile companies rose on May 30 after the Indian Meteorological Department announced on Sunday that monsoon has arrived three days earlier than usual in Kerala.
The early arrival of the monsoon along with five percent increase in sowing of kharif crops has significantly improved the outlook for rural demand, which is one of the major drivers of volumes for such companies.
Livelihood of almost 60 percent of the country’s population depends on agriculture, which in turn hinges on southwest monsoon rains brought by the wind from the Indian Ocean.
Rural demand has been under stress over the past few quarters as rising cost of food and fuel amid stagnant incomes forced consumers to focus on only essential items. “For the first time actually we've seen the rural pressure building up. There is a very clear signal that there is a compression in consumption, which is being visible in rural,” Dabur India said on a post-earnings conference call recently.
Even Relaxo Footwears said that it is feeling “more pain” in the rural economy after it announced it March quarter earnings recently.
Much like FMCG companies, automobile manufacturers, too, have faced weak volumes due to cut in discretionary spending in rural areas. The slowdown in the rural economy over the past few quarters has hurt the entry-level two-wheelers segment the hardest.
Market leader Hero MotoCorp reported a 24 percent on-year decline in volumes during the March quarter reflecting the weak demand environment in the rural areas.
“The rural demand is expected to take center stage in the near-term, driven by prediction of normal monsoon, robust Rabi production, higher agriculture prices and government subsidies,” said brokerage firm Sharekhan in a note.
Further, outlook on the cost side of the business is marginally improving following latest measures by the government and as global commodity prices have eased considerably following a rally in March-April.
For FMCG companies, reduction of import duties on edibles oils and softening of global food prices should ease pressure on their margins after most FMCG companies reported a sharp contraction in profitability in the March quarter.
For automobile companies, government’s steps to lower steel prices by imposing duties on exports as well as efforts to ease supply-chain bottlenecks caused by the pandemic are also expected to ease pressure on margins.
Automobile companies will also hope that the ongoing shortage of semi-conductors shows signs of easing tangibly after wreaking havoc on productions plans for the past 18 months. While commentary on the chip shortage from companies has been incrementally positive, companies still face challenges in securing adequate supply of chips.At 10:40 am, shares of Mahindra & Mahindra, Britannia, Hero MotoCorp, Hindustan Unilever, Emami, TVS Motor and Maruti Suzuki India were 1-3 percent on the National Stock Exchange.
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