Bharat Ahead
Consumption stocks are rising on expectations of rural demand outpacing urban demand

After three years of subdued growth, rural India is seeing a pick-up in demand. This has bolstered the prospects of consumer-focussed companies. Over the past few weeks, rural-oriented stocks were in the limelight as investors started making bets on likely beneficiaries of the rising rural demand like fast moving consumer goods (FMCG), automotives, consumer durables and non-banking finance companies (NBFCs).

What is driving these sectors are their Q4 FY18 numbers, which points to growth in rural demand. Corporate commentaries during earnings season from business-to-consu-mer (B2C) sectors like FMCG, auto, durables and retail reaffirm the momentum in growth. Companies now expect rural growth to outpace or at least match urban growth.

Consumer goods makers could report relatively better earnings in the fourth quarter as consumption continues to recover from the twin pains of the currency ban and the faulty GST rollout.

An analysis shows that earnings and volumes grew for the third straight quarter for most FMCG companies, led by market leader Hindustan Unilever, which reported seven-year high sales volume growth.

Companies have been showing signs of recovery from the Septem-ber quarter of the last financial year onwards and the trend has gained momentum since. Companies have highlighted a rising trend in sales of consumer durables, two-wheelers and tractors.

At 13.5 per cent, rural growth in Q4 outpaced urban demand, which rose at 10 per cent, according to a May 29 report by Nielsen India. The FMCG sector grew 11.3 per cent during the quarter and 13.5 per cent in the year through March, it said.

Among FMCG players, Britannia Industries’s volumes grew in double digits. Even Godrej Consumer Products witnessed faster growth in India’s hinterland compared with cities. Emami, too, reported volume growth in the January-March quarter.

“The platform is set well for us to get back to double-digit growth this year on the back of continued improvements in the economic environment, particularly stronger rural demand,” Vivek Gambhir, managing director and chief executive officer of Godrej Consumer Products, told investors in a post-earnings conference call. He expects the government’s focus on rural development and a normal monsoon to fuel consumption further.

But the rebound is not happening at a uniform pace. “We are seeing a pickup in rural (demand) across the country—not consistently everywhere, but in many places,” Sanjiv Mehta, managing director and chief executive officer of HUL, told investors. Mehta, however, said the worst was behind for rural consumption.

Analysts have become positive on the consumption recovery theme in the current calendar year. Corporate commentary in the recently concluded Q4 FY18 earnings season reaffirms an accelerated value migration in favour of consumption recovery. Predi-ction of a normal monsoon, expectations of higher minimum support prices for farmers and expansion of the Direct Benefit Transfer scheme, along with a busy election calendar should ensure a supportive and conducive backdrop for rural consumption.

The Nielsen report estimated that the FMCG market will grow at 10.5 per cent this year. “In India, for a long time now, rural markets have clocked a higher growth than urban markets, mainly because the headroom for growth is bigger for the rural space and affordability and awareness is growing there,” Sameer Shukla, executive director, retail measurement services, South Asia, Nielsen, said.

A recent Icra report had expected GDP growth in January-March 2017-18 at 7.4 per cent on account of good rabi crop harvest and improved corporate earnings, up from 7.2 per cent in the third quarter. Nielsen said that the IMD’s forecast of good monsoon along with higher minimum support price for the Kharif crop would give a fillip to rural disposable incomes and boost rural consumption.

Motilal Oswal Securities said its consumer universe reported 7.5 per cent year-on-year revenue growth versus its estimate of 8.3 per cent and 15 per cent YoY Ebitda growth versus estimate of  11 per cent. Adjusted profit after tax was at 17.4 per cent against the estimate of 11.3 per cent. It said 14 out of 18 companies posted in-line/above estimate earnings before interest, taxation, depreciation and amortisation (Ebitda). Coverage companies aggregate Ebitda margin expanded 160 basis points YoY versus estimate of 60bps, Motilal Oswal Securities said. However, only Asian Paints and HUL surprised positively on the volume growth front, it said.

The brokerage said the Q4 earnings season showed healthy performance by consumption and commodity-oriented sectors. “For the third consecutive quarter, all consumer companies under coverage (with a rural reach of over 30 per cent) have stated that rural growth has outpaced urban growth,” Motilal Oswal Securities said.

It has kept Britannia, Page Industries, HUL and Emami as the top picks from the sector.

It said Britannia, given (a) continuing investment in R&D and own manufacturing facilities and (b) leveraging of its enviable and consistently improving distribution, will keep finding additional growth levers.

According to the brokerage, Page offers a compelling, capital-efficient long-term lifestyle play on the growing and premiumizing innerwear category.

HUL will be a key beneficiary of the confluence of positive factors likely to drive rural volumes and the strong premiumization trend, it said.

On Emami, the brokerage said the company remains a credible long-term play due to (a) likely healthy growth in existing product categories, where it has a dominant market share, (b) best-of-breed R&D and advertising, marketing & promotion  spend, resulting innovative products as well as ability to back up innovation with strong marketing, and (c) much-needed efforts on improving its direct distribution reach.

Rating agency Crisil said the revival in rural demand could boost the topline growth of the Rs 3.4-lakh crore FMCG sector by 300-400 basis points to 11-12 per cent this financial year from 8 per cent in FY18.

While rural disposable income may go up because of higher minimum support prices, favourable monsoon rainfalls and more non-agriculture rural employment, continuing product launches from the companies side  will push volume growth.

 “Revenue growth from the rural segment, which contributes 40-45 per cent of the total income of the sector, will improve to 15-16 per cent in fiscal 2019 compared to 10 per cent estimated for fiscal 2018,” Crisil said. However, revenue growth from the urban segment is expected to stay steady at 8 per cent in FY19.

This shows the current upward movements in consumption stocks are predicated more on the rural demand than urban demand.


Ashwin J Punnen