The rural economy may get a leg-up from the higher MSP announced by the Centre and also a favourable monsoon rainfalls, more non-agriculture rural employment, which in turn will increase farmers’ disposable income, leading to consumption demand. From the marketers’ side, continuing product launches and greater acceptance of Ayurvedic and herbal products will also help.
The Indian Meteorological Department (IMD), in its first stage of forecast, sees a 'normal' monsoon this year, likely around 97 percent of the long period average. In 2017, the southwest monsoon was near-normal at 95 percent of the long period average.
Auto, FMCG and farm equipment stocks have seen huge buying interest as investors bet on improving rural demand on the back of higher minimum support prices (MSP), expectation of a favourable monsoon and rising rural disposable income boosting consumption demand.
Over the past month, rural focussed stocks like M&M, Colgate, GNFC, Dabur India, VST Tillers, Swaraj Engines and FMCG major Hindustan Liver have gained 10-18 percent.
Companies like HUL, M&M and other two-wheeler companies have reported better results driven by high rural demand. Expectation of a normal monsoon is driving the stocks higher.
It said the FMCG sector is likely to report 11-12 percent rise in revenue in fiscal 2019, up 300-400 basis points from 8 percent in fiscal 2018, driven by revival in rural demand and new product launches.
“Therefore, revenue growth from the rural segment which contributes 40-45 percent of the total income of the sector, will improve to 15-16 percent in fiscal 2019 compared to 10 percent estimated for fiscal 2018,” the report said.
Growth had recovered partially from the 5-percentage point range during fiscals 2016 and 2017, according to CRISIL, a period that saw sluggish rural demand resulting from weak monsoons, intense competition and demonetization. On the other hand, revenue growth from the urban segment is expected to stay steady at 8 percent in 2018-19.
“With normal monsoon and higher MSP along with improved procurement, we expect rural consumption will continue to accelerate," JM Financial said in a strategy note.
Market research firm Nielsen said a high single-digit growth rate for the sector in the April-June 2018 quarter versus the same period of 2017. According to the firm, food categories will continue to grow significantly faster than personal care and home care categories.
Nielsen said the industry will grow this year on account of a good monsoon forecast and with manufacturers passing on savings from GST rate cuts to consumers while a higher minimum support price announced by the government for the Kharif Crop is expected to give a fillip to rural disposable incomes and would boost consumption in the countryside.
Interestingly, the rural-focussed stocks have rallied ever since the IMD predicted normal monsoon for this year on April 16. FMCG stocks like Colgate Palmolive, Hindustan Unilever and Dabur India, tractor maker M&M and fertilizer producers such as GNFC and Punjab Chemicals have also rallied.
“In the last couple of years, urban volume growth has remained resilient at mid-single digit levels, but rural growth weakened after 2013-14. This continued to be the case till the June quarter of 2017-18, which was hit by supply disruptions ahead of GST implementation, said Motilal Oswal Securities in a note.
It further said “recovery in the past three quarters has happened despite disruptions in the wholesale channel due to GST implementation. The wholesale channel acts as a feeder for almost the entire rural demand in the sector.”
The brokerage firm has given buy ratings on all four stocks that have high rural exposure – HUL, Colgate-Palmolive, Dabur India (Dabur) and Emami. HUL and Emami remains their top rural picks from a medium term perspective.
According to CRISIL, “revival in rural demand may help boost the topline growth of the Rs 3.4 lakh-crore fast moving consumer goods (FMCG) sector by 300-400 basis points to 11-12 per cent this financial year.”
While mid-sized and medium-sized firms will have an edge because of better operating efficiencies in the GST regime and may clip at 15-17 percent, according to the report, large firms are seen growing top line by 300-400 bps to 11-12 percent. Smaller firms will continue to be buffeted by competition and GST, and register modest growth.
“Given the prospects, we see large and mid-sized firms augmenting growth through two flanks: acquisitions and new launches,” said Anuj Sethi, Senior Director, CRISIL Ratings. “Small regional players with established brands are likely to be acquired by larger peers, even if such deals are expensive, to reduce time to market,” he added.
Operating profit of large and mid-sized firms is expected to sustain at double-digits but rising cost and higher promotional spend will largely be offset by savings on logistics, transportation and from supply chain efficiencies.
