If an Ambit Capital analyst is to be believed, the story of consumer goods’ growth in rural India outstripping sales in urban India is history already.A recent Ambit report was titled: “Exit Rural India, Enter Premium India”.
Sustained high food inflation; expected moderation in government’s cash transfers, including NREGA (National Rural Employment Guarantee Act), to rural India; price hikes in consumer goods, durables and automobiles; rising cost of cultivation (up 68% for the farm sector during the FY08-FY12 period); oversupply narrowing the gap between average market price and average minimum support prices (MSP) of base-grade grains, from 52% in December 2009 to 16% in December 2011; the government’s restraint in buying… all these factors have shrunk rural demand, say analysts.
The story is unmistakable: depleting income in the hands of rural consumers. This is a worrying trend, confirm some analysts. Steroids that fueled the rural growth for the last five years seem to be losing their potency, says a recent report by Emkay Global Financial Services, highlighting impact on sectors such as consumption-durables and non-durables, banking, agri-inputs, automotives, tractors and cement.
But not everyone buys the rural scaremongering. For instance, Amitabh Mall, partner and director at the Boston Consulting Group, dismisses any material impact on consumption in both rural and urban India. “I do not see anything changing. There are fundamental drivers for growth in rural consumption, and they will continue to hold true for several years to come.”
For Mall, there are several key drivers of growth. The highest ever MSP offered to farmers is definitely one.Growing disposable income is another. Recent innovative efforts by consumer companies to make products available through haats, mobile vans and tie-ups with NGOs, are paying off, he says. “Temporary ups and downs apart, I am a firm believer in rural growth.”
Concurs A Mahendran, managing director, Godrej Consumer Products. “I am hearing the prediction (of rural growth slowing), but I do not buy that. When it comes to daily utilities like toilet soaps and other household items, consumption remains unaffected. In some discretionary categories, however, consumers could be cutting spends.”
Mahendran says the December quarter is typically dull for consumer goods sales. Better business is seen during the February-March and May-June periods. “One needs to patiently see the performance during these periods and then determine,” he says.
Mall and Mahendran’s optimism is not widespread though. FMCG major Dabur India that derives nearly 50% of its sales from rural markets, has already acknowledged the slowing demand in rural India. It has clearly felt the impact of a rural slowdown in its results for the first half of FY12. Its stand-alone revenue growth of 11.3% compares with 19.4% seen during the FY06-FY11 period.
An analyst at a foreign brokerage says rural consumers are far more price-sensitive than urban consumers and so are likely to down-trade faster. Automobiles and durable sales have already been impacted, while some predict the effect to pass on to consumer goods in household and personal care.
Durables’ growth, in fact, has slowed down considerably in FY12 as rural consumers tightened purse strings. Volume growth has tanked across product categories — televisions, air-conditioners, refrigerators and washing machines. The penetration of durables in rural India is very low, yet competition among brands is intense.
For the first time in the last three-four years, volume growth of the fast-moving consumer goods (FMCG) sector is seen lowering. Recent analyst reports point to volume growth going below the current 8-9%. Analysts expect companies with higher rural exposure (30-50%) like Dabur and Hindustan Unilever to be impacted more than Marico, Godrej Consumer Products, GlaxoSmithKline and Nestle that have lower exposure (25-30%).
Categories like detergents, soaps, toothpaste, hair oils and shampoo will be at risk from lowering rural spend. Food is, however, not likely to be impacted.
Mall of BCG says India is one of the highest ‘trading-up’ markets. This means, Indian consumers are moving from unpackaged to packaged products, buying more premium items and spending hugely on food.
“Volume growth in FMCG should improve while price and volume growth put together should give the sector promise of strong double-digit growth,” says Mall.
The Ambit report states that the “FMCG industry is grappling with a rural slowdown even as sales growth for premium products accelerates. We are positive on the food companies — Nestle, GlaxoSmithKline Consumer and Agrotech — as packaged foods are well-suited to the premiumisation trend”.
Striking a cautionary note, the report further states that the one-off effects of the cash injections from the government on farm loan waiver and pre-election spending have worn off. While NREGA is still in action, its ability to deliver incremental growth year-on-year is now non-existent.
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