India Inc brace up for bad monsoon

India Inc's hopes of a recovery this fiscal have received a jolt after forecast of below normal monsoon raised a spectre of drought this year.

Companies, especially those with rural focus, are revisiting strategies to counter demand slump if the forecast by India Meteorological Department (IMD) last week plays out.

Industry experts and company officials across sectors dna spoke to said India's economy, which largely dependent on monsoon, may see a further impact on consumer sentiments leading to lower demand for consumer products like two-wheelers, FMCGs and electronic goods.

"Bad monsoon impacts the overall value chain. So if agri production is below average, it will have an impact on sales of commercial vehicles (CVs) and tractors. Sales of two-wheelers and small cars may be hit due to inflation and its impact on the rural economy," said V G Ramakrishnan, MD, Frost & Sullivan, South Asia.

Many auto companies are expecting a marginal growth of about 3-5% this fiscal on account of low base after declining sales of the last two years.

According to industry players, manufacturers and suppliers have even started ramping up production anticipating demand revival.

However, experts feel that in case of a bad monsoon, ramping up production will only add inventories in the system.

Hyundai Motor India, the second-largest car maker, is chalking up strategies if the monsoon hits demand.

"Rains are critical for the performance of the auto industry, especially rural sales. It also kick-starts the festive season sales. It's still an early prediction and we are hopeful of a good monsoon," said Rakesh Srivastava, senior VP, sales & marketing, Hyundai Motor India.

"In a below-normal monsoon situation we may look at advancing our launches this year and build on the existing products with new marketing initiatives," he said.

Anil Dua, senior VP (marketing & sales) of India's largest two-wheeler manufacturer Hero MotoCorp, said pre-monsoon sales, which fall in the first quarter of the current fiscal, are also critical.

"Even though it is too early to predict demand, we will go big on Q1, which will also help us further," he said. Around 48% of company's sales are in rural market.

He said growth in two-wheeler sales could be 8-9% this year. However, monsoon can be a dampener, but it will not wipe off the momentum.

Vinod Aggarwal, CEO of Volco Eicher Commercial Vehicles, said his company is optimistic about 2014-15.

For consumer goods, including consumer durables, electronics and food products, the situation is similar.

Kamal Nandi, business head and executive vice-president, Godrej Appliances, said the below-average rainfall will definitely impact agri-produce and disposable income in small towns areas that are big markets for home appliances and consumer durables.

"It will lead to food inflation, and cost of living will go up, eventually making it difficult for urban markets as well. Our past experience of similar situations tells us that the entire festive season goes for a toss as sales get impacted and there is de-growth of 10-15%, which is very huge for consumer companies. As the pie shrinks, brands get aggressive trying to gain market share, thus the overall industry loses money," he said.

Lalit Malik, chief financial officer, Dabur India, said unseasonal rains this year haven't had any major impact till now as this hasn't affected the production of fruits that the company sources in the country.

"While it's a fact that weak monsoon do impact sentiment, it doesn't alter the dynamics of consumer demand to a great degree. The fact remains that even after poor monsoon, demand for daily use products are not hit that hard. We will have to wait and watch how the situation develops," said Malik.

On impact on consumer companies, Gaurav Gupta, senior director, Deloitte Touche Tohmatsu India Pvt Ltd, said below average rainfall is not a good news for across sectors.

He said it could happen in three ways. "A lot of consumer products require commodities, the prices of which have been fairly stable in most cases for the last two years. If at all rainfall is not as per expectations, we could see increase in commodity prices."

"Secondly, rural spending that is already seeing some pressure will see further decline. And rural is a big focus area for a lot of consumer goods companies these days. Third possible impact will be the increase in prices of food products. As a result, people are likely to preserve spending on certain discretionary items."

Kunj Bansal, ED & CIO, Centrum Wealth Management Ltd, believes that the impact could be in the form of reduced sales and/or margin pressures. "But major impact is likely to be in the form of reduced sales as companies may not be too keen to push sales at the expense of margins. It becomes very difficult to increase prices after one has reduced them earlier," said Bansal.