FMCG demand may not get affected by the vagaries of the monsoon!

The India Meteorological Department (IMD) has further lowered the expected rainfall to 93 per cent of Long Period Average (LPA) owing to the El Niño effect. This doesn’t necessarily mean bad news for top firms (HUL, Dabur) in Fast Moving Consumer Goods (FMCG) sector.

Further, IMD has also raised the probability of an El Niño event to 70 per cent from the earlier 60 per cent. Even, the US weather forecaster in its latest monthly outlook of June stated that there is a 70 per cent chance of the event occurring this calendar.

Moreover, private weather company Skymet has forecast a below normal monsoon for 2014. It has stated that rainfall would be 94 per cent of Long Period Average (LPA). In monsoon terminology, as per IMD, any rainfall figure between 96 per cent and 104 per cent of the average seasonal rainfall is categorised as a normal monsoon.

A study conducted by Nomura research for the past 15 years pointed out that FMCG sector sales are less impacted by the vagaries of the monsoons. The study revealed that rainfall and the FMCG sector growth have a correlation of approximately 20 per cent.

During the period under review, the monsoons were significantly deficient (more than 4 per cent below the LPA) for six years. While FMCG sector growth has averaged zero per cent between FY02-04, it has recovered since to 13 per cent per annum.

Interestingly, two of the six monsoon-deficient years have come since FY05. In 2009-10, when India witnessed drought situation, average growth reported by the sector was nearly 15 per cent. However, in FY13 (when rainfall deviation was - 8 per cent) growth rate was 14 per cent.

Furthermore, there is no clear evidence which suggests that monsoons have a significant impact on the volume growth of the sector. This trend can easily be seen in the volume growth posted by HUL (Firm considered as a proxy for consumer demand in the sector) in the quarter immediately after the monsoon season.

While in FY10 (When monsoons were 22 per cent deficient) HUL reported volume growth of 5 per cent, in FY08 (when monsoons were above normal) HUL posted a volume growth of 8.4 per cent. Moreover, despite strong monsoons last year, HUL registered a volume growth of 4 per cent.

There has been no significant improvement in the average volume growth trajectory of the sector as it is still hovering in low single digits. It seems that volume growth is more correlated to GDP growth than to vagaries of the monsoon.

Importantly, over the past few years, although agricultural output has become a more important demand driver for the FMCG sector yet Agri GDP and FMCG sector sales have a correlation of only 26 per cent.

Exhibit: Rainfall departure and Agriculture growth in per cent over the fiscal years

Source: IMD, Nomura Research, Morgan Stanley Research