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Good monsoon - yes, Rural boost - yes, Revival? Not yet

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This year’s better-than-expected monsoon may bring much-needed relief to slowdown-ravaged auto and consumer companies as rural incomes appear set to rise, promising boost to rural consumption.

According to reports, this year’s monsoon has been timely and 20-30% above average in the main crop-growing regions. This has prompted farmers to expand cultivated area by 9% to 930 lakh hectares, with the biggest gains in pulses, oil seeds and coarse cereals.

Even in terms of slowdown, demand in the rural market has been better than that in the urban market so far. But the pace of growth in the rural market, too, has slowed, say industry experts.

Going ahead, demand in the urban market is expected to either remain flat or slip further. But the rural market may see an uptick in demand as rural incomes will likely rise on account of higher yields and minimum support prices (MSP) for agri-produce.

For auto-makers, glad tidings in monsoon may bring some relief ahead of the festive season. Hyundai Motor India, the country’s second largest car manufacturer, said it is increasing its rural penetration from the current 270 sales outlets to 350 by the end of this year. The rural market accounts for 17% of Hyundai’s sales, up from around 15% last year.

“Rural demand is currently stable as the rural economy is slightly untouched by the current slowdown,” said Nalin Kapoor, senior GM and group head, Hyundai.

For market leader Maruti Suzuki, its rural market accounts for around 28% of sales, up from 25% last year. According to reports, the company is expecting the growth to accelerate in the second half of this fiscal (October-March), thanks to the monsoon.

A recent report by domestic brokerage Prabhudas Lilladher stated that two-wheeler sales are likely to recover in the second half. “Going by the current trend of rising rural, the outlook on two-wheelers is positive. Low penetration level, lack of adequate public transport and rising per capita incomes in rural India would lead to long-term healthy volume of two-wheelers. With rural economy accounting for 40-45% of the sales of two-wheelers, we expect good times ahead for two-wheeler manufacturers,” wrote Surjit Singh Arora, an analyst with the brokerage, in a note.

However, industry players do not expect the rural demand to really offset the overall slowdown in vehicle sales. “No great recovery yet. Good monsoon will hopefully drive a better Q3 (third quarter, October-December) but will remain flat as compared to last year,” said K Srinivas, president (motorcycle business), Bajaj Auto.

Tractor sales on the other hand are already in recovery mode, after having witnessed a slowdown last year due to delayed monsoon. The domestic tractor industry witnessed a strong growth of around 26% in Q1, and is expected to remain in double digits.

Pawan Goenka, president, farm equipment and automotive sectors, Mahindra and Mahindra, told reporters at the company’s Q1 earnings conference recently: “Tractor sales have been robust on three grounds: we have seen the best monsoon in three years; farmers’ income is growing due to MSP; and overall positive sentiment.”

FMCG (fast-moving consumer goods) companies are also pinning their ho
pes on improved consumer sentiment in the hinterland on account of the monsoon.

N Krishna Mohan, CEO (sales, supply chain and human capital), Emami, says that based on past experience, abundant rains have always resulted in a better second half of the year. “Emami gets 40% of its revenues from rural areas.
We’re hopeful that we’ll see a positive impact in the third and fourth quarters.”

An Edelweiss report by Abneesh Roy and Pooja Lath points out that apart from the good monsoon, an election year in 2014 that could lead to good liquidity in the market and the implementation of the Food Security Bill, will further propel rural demand.

Milind Sarwate, CFO, Marico (which gets 32% of its revenue from rural markets), says, “Companies have been increasing their marketing and distribution spends in rural areas. This, coupled with other factors, is improving overall growth.”

While there is consensus that the overall demand scenario is showing signs of improvement, thanks to the monsoon, a complete revival is still some distance away.

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