Covid-19 crisis: Consumer firms fear sales hit as virus reaches hinterland

Rural India was largely unaffected by first wave of Covid-19

A year ago, when the first wave of Covid-19 upended lives in India’s metros and smaller cities, rural India, which was relatively insulated from the impact of the pandemic, came to the rescue of consumer-facing firms. But the second wave, which is a lot fiercer and secular in nature, has everyone worried.   

As the pandemic reaches the rural hinterland, sentiments are turning negative. Consumers are tightening their purse strings and saving for health emergencies. Amid localised lockdowns and a persistent increase in Covid cases, sales of tractors, two-wheelers, and consumer appliances have started feeling the heat. Top consumer goods companies have warned of an impending slowdown in rural sales as the pandemic weighs on economic activity.   

Sanjiv Mehta, chairman and managing director of Hindustan Unilever, the country's largest consumer goods company, told Business Standard: “An impact on rural sales is a possibility we cannot rule out as the infection spreads fast.” This would affect economic activity in rural areas, he added.

The impetus given to rural areas last year, including direct benefit transfers, a higher allocation to the Mahatma Gandhi National Rural Employment Guarantee Scheme, and raising food subsidies, might have to be considered again, said Mehta.

Tractor sales, a proxy for the health of the rural economy, are set to be disrupted too. So far, the tractor segment has remained largely unaffected. Tractor makers fear if the situation persists and the pandemic doesn’t recede in two to three weeks, it will mark a dry spell for them as tractor purchases, unlike cars, are linked to specific seasons.

Hetal Gandhi, director, Crisil Research, said, “We feel the impact of Covid-19 will be a lot more pronounced in rural India in May.”

Tractor makers are already seeing an impact. Market leader Mahindra and Mahindra has a third of its dealer outlets shut, and it fears disruptions in the production and supply chain on account of absenteeism and oxygen availability for industrial use.

“Supply chains are getting stretched and dealerships in many districts with localised lockdowns are non-operational. Unlike the first wave, when the pandemic hadn’t impacted the hinterland, this time around it’s widespread,” said Hemant Sikka, president (farm equipment sector) at the firm. The walk-ins into tractor dealerships have reduced, he said.

Raman Mittal, executive director, Sonalika Group, agreed. “Unfortunately, this wave is going a lot deeper into our country and it’s very scary. The situation is very dynamic and it's difficult to keep track of retail outlets and whether they are open or shut. Unlike the last wave, nothing is predictable,” he said.

On account of a very low base of last year due to the national lockdown, April sales, at most tractor firms, saw sharp year-on-year growth. Mahindra’s Sikka said April should be seen in two phases – after and before festivals, as a sharp rise in Covid cases post festivals impacted sales.

“The only reason is Covid. Otherwise all agri-related factors remain very positive – rabi crop harvest is bumper; procurement is in progress; and forecast for Monsoon remains positive. If we are able to bend the Covid curve in the next two to three weeks, it's fine. In fact, we will have pent-up demand. But if it doesn’t and lasts beyond a month, it will be a concerning situation," Sikka said.

Crisil’s Gandhi says the seven-day moving average curve of the top 10 districts – which include the metropolitan cities -- is flattening in terms of case load, but overall it still remains as high as 400,000 plus, which clearly shows the case load is moving beyond the top 10. That will have its own impact on consumption, she added, pointing out that the high number of fatalities in the second wave is higher in terms of absolute numbers.

Reflecting the impact, motorcycle sales (wholesales) dropped 40 per cent in April 2021 over April 2019, while tractor sale growth moderated to 16-17 per cent in April 2021 over April 2019. A comparison with April 2020 doesn't make sense as Covid-related disruptions had taken effect by then, she said.

But two-wheeler market leader Hero MotoCorp remains optimistic and hopes for normalisation from the September quarter. “We expect normalcy to kick in from the second quarter with a likely slowdown in Covid-19 cases and higher vaccination levels,” said Chief Financial Officer Niranjan Gupta in an analyst call.

Rural sales are going to be robust due to a healthy monsoon and harvest season, and a rebound in GDP should aid the industry’s recovery from the September quarter onwards, Gupta said. “The company also expects a significant growth in its global business with a renewed thrust on developing key overseas markets,” he added.

Gupta also said that as of now the company hadn’t changed its plan of Rs 1,000 crore capex for FY22 as it expected the number of cases to plateau. “In the next analyst call, I am confident that we will not be discussing Covid anymore,” he said.

While the fast-moving consumer goods (FMCG) market typically sees an impact with a lag, the durables sector has been harder hit this summer. "Yes, the second wave of Covid-19 is widespread. This has impacted demand from the smaller towns," said Kamal Nandi, business head and executive vice-president, Godrej Appliances.

About 70 per cent of sales for durables companies come from urban markets and the rest from rural areas. Though big cities continue to be vulnerable in the second wave, the trend of stricter measures in small towns and even rural areas in states such as Maharashtra, Punjab, Kerala, Madhya Pradesh, Uttar Pradesh and Chhattisgarh hardly bodes well for the market.

April 2021 saw a 40 per cent decline in sales for the appliances market versus the same period of 2019. May is turning out to be equally challenging, since the curbs have not been lifted at all, said Nandi, who is also the president of the Consumer Electronics and Appliances Manufacturers Association.