The performance of fast moving consumer goods (FMCG) stocks has been mixed so far in 2023. Shares of Bajaj Consumer Care Ltd., Dabur India Ltd. and Emami Ltd. have declined 6-14 per cent so far. On the other hand, Nestle India Ltd and Godrej Consumer Products Ltd (GCPL) have gained 5% and 11%, respectively.
One important factor for the difference in stock returns may be due to companies’ different levels of exposure to rural markets. As the chart shows, Bajaj Consumer, Dabur and Emami derive around 45-50% of their sales from rural areas. The rural sales share for GCPL and Nestle is at 25-28%.
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Note that the slowdown in rural demand is a matter of concern for investors in FMCG stocks. Here, the uncertainty over the monsoon adds to the anxiety. Dabur and Marico highlighted muted rural sentiments in their pre-quarter updates for the three months ended March (Q4FY23). Dabur said that on a quarterly basis, the demand in rural markets improved slightly in the fourth quarter but did not improve completely. In contrast, data released recently by Bizom, a retail intelligence platform, showed that 16.8% year-on-year growth in rural sales in the March quarter was ahead of 7.9% growth in the urban market. Bijom said rural outperformance was fueled by strong stocking across most product categories as well as some stock push for summer products at kirana stores. But Nuwama Research said the Bizom data did not match the brokerage’s findings, pointing to a faster recovery in rural FMCG. However, Nuwama believes that the worst is likely for the villager.
In general, analysts are of the view that the rural pain has probably subsided. “The base will become more favorable for rural FMCG demand from the first quarter of FY2024,” Nuwama said.
Given this, the commentary by FMCG firms on rural demand during Q4 results needs to be closely watched. “With inflation levels easing and MNREGA jobs count in line with pre-Covid levels, the worst appears to be over for the rural economy. “We expect further signs of rural demand pick-up going forward,” said Alok Shah, an analyst at Ambit Capital.
To be sure, investors will be closely watching for El Niño conditions this year, which could affect crop production. Analysts at Jefferies India said rural trends were better in March.
“While weak summer rains/crops are likely, we believe the rural economy is more than just agriculture,” Jefferies India said in a March 19 report.
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