Consumer Demand Points To Rural Recovery

Consumer goods makers reported better earnings as consumption continues to recover from the twin pain of the note ban and a nationwide sales tax rollout.

Earnings and volumes grew for the third straight quarter for most fast-moving consumer goods firms in the three months through March, according to their exchange filings. That was led by market leader Hindustan Unilever Ltd., whose sales volumes growth stayed at a seven-year high.

Consumer-focused companies had struggled after Prime Minister Narendra Modi first outlawed 86 percent of the currency in circulation to target unaccounted wealth, and then rolled out India’s biggest indirect tax overhaul—the Goods and Services Tax—in less than a year. Consumption declined and manufacturing slowed. The recovery that began in the three months to September has only strengthened, with GDP growing at its fastest pace since the note ban in the March quarter.

Even rural demand has shown signs of a revival, consumer goods makers said. That reinforces the trend highlighted by rising two-wheeler and tractor sales.

Rural Outpaces Urban

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

Britannia Industries Ltd.’s volumes grew in double digits due to increased reach in rural areas in the fourth quarter. Even Godrej Consumer Products Ltd. witnessed faster growth in India’s hinterland compared with cities. Emami Ltd. also 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 at Godrej Consumer Products, told its investors in a conference call after its earnings. He expects the government’s focus on rural development and a normal monsoon to further fuel consumption.

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

Agreed DK Joshi, chief economist at Crisil. “It (rural demand) is a rebound from demonetisation and GST, and the construction activity seemed to have picked up which is co-related with consumption,” he said. “But there are no indications of an all--round pick-up in the rural economy as farmers’ income is still affected as crops are sold below the minimum support price.”

Reasons For Recovery

The overall economy has rebounded over the last three quarters, with growth rising to 7.7 percent in the three months to March. Also, cash in the economy is back at the pre-demonetisation levels.

Another boost came from lower tax rates under the GST. Rates on a host of items like detergents, soaps, shampoos and beauty products were brought down from 28 percent to 18 percent in November. HUL’s Mehta, however, told investors that it was difficult to quantify how much of the company’s growth came from reduced prices.

Cost Cuts To Protect Margins

Raw material costs rose during the quarter ended March, putting pressure on operating margins. Most consumer goods makers focused on cutting costs and improving efficiencies.

“We’ve definitely been investing in our brands and at the same time finding ways to improve gross margins and manage our cost to deliver strong margins,” Gambhir said. Godrej Consumer Products managed to sustain margins due to strategic sourcing of key ingredients like molecules in household insecticides or covers on perfume.

Dabur India Ltd. said its margins rose on network optimisation and HUL too attributed improved margins on cost-saving measures.

Growth Drivers

• Britannia Industries said its volumes rose in double digits, driven by increasing direct distribution reach in rural areas and weak states.
• HUL witnessed robust double-digit growth in the laundry segment across brands like Wheel, Rin and Surf Excel.
• ITC Ltd.’s FMCG business also witnessed a 10 percent growth, led by packaged foods.
• HUL attributed higher growth in soaps to premiumisation.
• Godrej Consumer Products attributed its 19 percent growth in soap sales to increasing market share as smaller companies face challenges in some parts of the country.

Laggards

• Rising copra prices and a high base hurt sales of Marico Ltd.’s Parachute coconut oil as volumes fell 5 percent.
• Higher tax rate on cigarettes impacted ITC’s cigarette sales. According to Edelweiss Securities, ITC’s cigarette volumes declined 1-2 percent during the quarter.
• Godrej Consumer Products sales of Good Knight insecticide and Dabur’s Odomos witnessed soft demand during in a seasonally weak quarter.