Friday, March 29, 2024

Advertisement

Rural demand remains resilient despite rising distress

Vjmedia Works | May 22, 2015

Many companies with significant rural exposure have reported better growth in rural areas in the quarter gone by

The drop in sale of two-wheelers and tractors might raise doubts about demand scenario in rural areas. But other macro numbers suggest that rural demand remains resilient, despite rising distress following unseasonal rains in March and April this year.

Many companies with significant rural exposure have reported better growth in rural areas in the quarter gone by. And most of them expect growth momentum to continue in the coming quarters if there is no downward revision in the current monsoon forecast.

The country's largest auto-maker Maruti Suzuki is so bullish about rural demand that it plans to expand its network from 125,000 villages it operates in at present to 150,000 villages in the next one year. The company posted a robust 23 per cent growth in rural areas in the last financial year compared to 11 per cent in urban areas.

Companies like Godrej Consumer Products, Hindustan Unilever and Marico have reported a similar trend, while declaring quarterly earnings in the last few days.

What is perceived as demand slowdown might be a "temporary hiatus" in a long-term growth cycle as consumption-led growth, though delayed by a few months, "is just one or two quarters away", argues SK Munjal, chairman, Hero Corporate Services and Joint Managing Director, Hero MotoCorp.

He adds that the additional benefits of increased investment are about to kick in now. He, therefore, expects rural demand to pick steam soon, once the economy regains growth momentum. He dismisses any adverse impact of below par monsoon as "the impact of marginal shortfall in rains is almost zero" on rural demand. Only downside risk, he reckons, is if the shortfall is significantly higher than currently forecast and is more in the areas with lack of irrigation facilities. "The impact would certainly be felt in terms of demand of goods, especially those which have a discretionary spend." He cautions.

Senior executives of FMCG (fast-moving consumer goods) companies this reporter spoke to remain bullish about continuing rural growth. "What is heartening to note is the emergence of a class of super consumers in rural areas. They are the ones who are driving our sales in all product categories. And we expect them to continue to do so in coming quarters," says Sunil Kataria, business head, Godrej Consumer Products. Dabur's Chief Financial Officer Lalit Malik concurs: "We have not seen any material impact on rural demand due to the unseasonal rains. Syndicate data, in fact, reveals that rural demand has been quite resilient and growing at a strong pace."

Reported numbers, too, support such optimism. While Godrej posted a growth of 17 per cent in rural areas in the last quarter compared to nine per cent in urban areas, Marico's rural sales growth at 26 per cent was much higher than urban sales growth rate of 18 per cent.

For the sector as a whole, rural value growth at 11.3 per cent was more than double of growth seen in urban areas in the last financial year. And in the quarter just gone by rural growth was even higher at 14.8 per cent compared to eight per cent in urban centres.

"It is true that some of the growth has come about because of network expansion as most of the FMCG companies have grown their reach in the last two-three years. But that is not the only factor. Rural demand has been robust and based on syndicate data we expect rural growth to be 30-40 per cent higher than urban growth this financial year too," says a senior executive of a leading FMCG company. He did not wish to be named as he is not authorised to speak.

Incidentally, Godrej increased its network from 15,000 villages three years to nearly 55,000 villages now. Similarly, Dabur expanded its coverage from 14,000 villages to 44,000 villages in the same period. The company now intends to add another 6,000 more villages in the next one year. Maruti, too, has increased its footprint from 93,000 villages to 125,000 villages in the last one year.

While some companies have shown good rural growth, the two sectors which get most of their sales from the countryside- two-wheeler and tractors- have reported degrowth in the last few months. In the quarter gone by, Hero MotoCorp, one of the largest two-wheeler manufacturers, with significant rural presence, reported a marginal drop in sales. While company officials do concede demand has been sluggish in rural areas, they also say this has happened after years of good growth.

According to Society of Indian Automobile Association data, the two-wheeler segment has shown consistent good growth year after year since 2009-10. The sales have grown from 9,370,951 to 16,004,581 units, a growth of 70 per cent, during 2009-10 to 2014-15. Passenger vehicles have grown from 1,951,333 to 2,601,111 units in the same period, which is a growth of little over 33 per cent. Experts, therefore, point out that marginal degrowth in the two-wheeler segment could be because of high base effect and may not be reflective of drastic fall in demand environment.

However, significant fall in sale of tractors, from 634,151 in 2013-14 to 551,463 units in 2014-15 does indicate that the agricultural side of rural economy is under some sort of distress.

Experts say the trajectory of rural demand will depend a great deal on how monsoon pans out. "Any improvement in rural demand is unlikely to happen for at least one more quarter. The extent of improvement beyond that will depend on a host of factors, including how the monsoon impacts crop yields and the level of MSP (minimum support price) hikes," says ICRA's senior economist Aditi Nayar.

Advertisement

Related News

Advertisement
Have You Say
Advertisement
Resource
Follow Us On
Advertisement