The Indian FMCG sector’s third-quarter (Q3FY24) earnings showed that the rural demand failed to rise to expectations despite falling commodity prices and a strong GDP growth rate. Analysts now expect recovery to pick up in the next quarter, driven by economic boosters for the rural sector, stable macros and an MSP hike.
FMCG companies had expected a revival in rural consumption, as commodity prices began to cool off in 2023. However, low incomes due to erratic rains and low savings due to the pandemic continued to weigh on rural demand recovery.
The FMCG industry grew six percent in value terms in Q3, with consumption moderating in both urban and rural areas during the quarter. A decline in major raw material input costs helped FMCG companies with a pick-up in gross margins. But inflationary concerns, uneven monsoon during kharif season and weak rural consumer sentiment added to the slowdown in FMCG sales.
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What hurt rural demand recovery in Q3
The FMCG volume growth on a four-year CAGR basis remained at low single-digits in Q3, with rural and mass categories even lower than urban and premium categories, said Saugata Gupta, MD & CEO, Marico Ltd, in an earnings call.
Hindustan Unilever also said that rural incomes and agricultural yields were impacted due to the effect of uneven monsoon on the kharif crop. Two-thirds of India’s population resides in rural regions.
Consumer FMCG companies’ management commentary on rural recovery was not encouraging in the quarter. Barring a few companies such as Dabur and Pidilite, the rest of them saw higher urban growth than rural. Most companies are seeing a similar demand trend continue in the near term.
When and how will rural stress be alleviated
"Rural stress will only be alleviated when the monetary flow eases, and the rural consumer becomes more confident in spending; and here, the approaching monsoon season in a couple of months, would also play an important role,” said Aamar Deo Singh, Sr VP Research, Angel One. “Further, the government’s role in providing impetus to driving rural income, is also a crucial aspect, which definitely cannot be ignored,” he added.
Going forward, analysts at Motilal Oswal expect rural recovery to be more steady, and recent price cuts/consumer offers to reflect in volume growth pickup.
"We are hopeful of gradual rural recovery, supported by government initiatives to boost rural income, a rebound in rabi acreage, and a moderation in inflation. Concurrently, companies are implementing measures to stimulate demand and drive volumes,” said K A Vincent, Research Analyst, Geojit Financial Services.
Going into CY24, while benign inflation and a slight increase in minimum support price (MSP) should augur well for a rural recovery, there is a risk that the growth may remain uneven, said BNP Paribas.
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Budget booster for consumption; inflation outlook benign
In the fourth quarter, NielsenIQ is seeing an uptick in consumption, primarily driven by habit-forming categories, such as biscuits and noodles, in food and essential home products.
“The favourable interim Union Budget 2024-25, supporting several economic boosters for the rural sector, should augur well for companies with a rural strategy,” said Roosevelt D’souza, Head of Customer Success at NielsenIQ India.
According to industry experts, the Budget is positive for rural consumption over a five-year horizon. The next six months, however, will depend on how the rabi crop shapes up. If the harvest is good, demand will definitely pick up.
According to Angel One, there are early signs that FMCG firms' situation could improve over the next couple of quarters, given that inflation is under control, energy prices are comfortable, and investor expectations that the current set of government policies will likely continue and even gain pace, post the parliamentary elections.
Time to buy FMCG stocks?
According to Aamar Deo Singh of Angel One, the FMCG sector is expected to grow at 4-6.5 percent in 2024, indicating an average growth. But it is likely that some bright spots could emerge in the sector, offering investors an opportunity for decent returns.
“The Nifty FMCG index corrected almost 10 percent from its all-time highs, further indicating that savvy investors would want to enter only on reasonable valuations. So, investors need to keep a close watch on the key return drivers such as the uptick in rural spending, government spending, CPI data, along with RBI policy,” he said.
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The FMCG sector is anticipated to achieve mid-single-digit growth this year, according to Vincent, primarily driven by volume expansion, as price growth becomes negligible. "Caution persists due to low reservoir levels, which may impact rural recovery efforts. However, the positive outlook for rabi acreage offers some reassurance," he said.
“FMCG valuation witnessed some correction recently and is currently trading moderately above the long-term average, reflecting some caution amidst expected gradual improvement in rural demand. We have a constructive view on the sector and suggest adopting the ‘buy on dip strategy’,” he added.
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