FMCG/2 Wheeler/Rural credit growth should accelerate in the near term: IIFL Securities

19 Apr 2022 , 10:50 AM

Recent signs of rural stress
The research team at IIFL Securities has been interacting with rural industry intermediaries and experts frequently. They have read through the pre-result releases and commentaries from FMCG companies. The team concludes that there have been some signs of stress — real rural wage growth has trended down to almost zero, rural unemployment has been stubborn at over 7% with falling labor participation rate, MNREGA HH demand has been 26% higher than the level of 2 years ago, and fertilizer prices are up sharply (DAP up 34% in 2 months).
Till February 2022, mainstream companies witnessed sluggish FMCG rural revenue growth, going by their management commentary. In its Q4FY22 preview call, HUL said: “Market growth further decelerates in January-February 2022 to high single digit decline in volumes versus mid-single digit decline in Q3FY22”; and that “Discretionary categories such as hair and skin care have been more impacted than home care”. Dabur pointed to potential down trading across categories, and Marico indicated that “weak rural sentiment and inflation in global commodities is driving volume declines in FMCG in the January-February 2022 period YoY”.

MNREGA count still high - the last 6-month (October 2021-March 2022) average demand is 22.6 million HH versus 17.9 million in the 6-month period immediately preceding the onset of COVID (October 2019-March 2020) — another pointer of rural stress. Farming EBITDA may not expand much, as demand conditions are not strong enough and high agri output prices can hit volumes, whereas agri input costs have risen. India imports 90% of its potash needs, of which 40% normally comes from Russia; fulfillment of such requirements has now been impeded. Potassic and Phosphatic fertilizers are also fixed-subsidy items and hence the effective cost of fertilizers has increased, with a consequent fall in volumes. Additionally, there being no guarantee that the high prices will sustain poses a risk to importers.

GST rate increases are also likely — exemptions may see the beginning of a phase-out via a move to 3%, and the existing 5% rate may increase to 8%, affecting consumption goods related to the low income segments. Fertilizer supply does not seem to be short; in fact, there may be a decent chance of India securing some fertilizer purchases from China, despite the recent uneasy relations between the two countries.

Government support to rural strong: Recently, the PMGKAY — the government’s free food grain scheme — has been extended by six months to September 2022. Analysts at IIFL Securities think that given the high market prices, some of this free grain will find its way into the open market (including exports) and, in turn, help increase money flow in the rural-agri economy.

Rural workers have begun migrating back to cities — this means that there will be fewer rural mouths to feed and, hence, marketable surplus can rise a bit, together with remittance income resuming. All this also points to improvement in prospects of rural discretionary spending. Consumer sentiment (rural) is improving as per CMIE. In the medium term, high prices can lead to experimenting with new export items, e.g. corn, of which India is a fairly cheap producer.

Disbursements by rural-focused banks and MFIs have risen: Team IIFL Securities’ interactions with several companies indicate strong recent pick up in disbursements towards the rural and semi-urban segments as well as in MFI & SME segments. Pre-quarterly numbers released by a few players confirm the same.

Sentiment in rural India has inflected upwards: In summary, analysts at IIFL Securities feel that sentiment in rural India has inflected upwards as of March, and for tangible reasons; this should bode well for rural consumption in the next few months. Inflation is a significant irritant, but they believe that inflation should begin to cool off soon, owing to: 1) slowing global growth; 2) global commodities consumption, especially of crude and gas, adjusting to some extent to the new geopolitical reality and sanctions; and 3) China eventually making its peace with Omicron in the next 3-4 months and joining the rest of the world in a full reopening, which will help mitigate supply chain pressures (though it will also create stronger demand in China) and, in turn, inflationary stress. Given this, Central Bank tightening should not be very sharp beyond the next few months. Companies with a relatively high proportion of revenues from rural, including FMCG players, 2 wheelers, telecom, rural credit and agri input companies should do relatively well in this unfolding environment.