Just a couple of weeks back, there was a minor scare that a below normal monsoon was likely to interfere with the bullish rural growth plans of major fast moving consumer goods (FMCG) players.
Rural India contributes to anywhere between 30- and 50 per cent of the FMCG sales of players like Hindustan Unilever (HUL), Dabur, Colgate, Marico, Godrej, Cavincare, Emami and ITC. This includes feeder supply from wholesalers in urban India to tertiary markets, according to analysts, and the contribution is growing by around 15-20 per cent annually. Had the rainfall weakened during this peak sowing season (June-July) for kharif crops, it was bound to have put pressure on the incomes of rural households.
Now, not only have the monsoons strenghtened but the Union Budget 2009-10 announcements, too, have boosted rural sentiment. Demand from the rural sector helped the estimated Rs 100,000 FMCG crore industry grow at around 17-18 per cent in the last financial year despite heavy odds such as rising input costs, high inflation and the economic downturn.
This year, too, the sector hopes to continue to build on the momentum to spur income levels particularly in rural areas. Allocation to the National Rural Employment Guarantee Scheme (NREGS) has been enhanced by 144 per cent to Rs 39,100 crore and a six-month extension has been provided for debt relief to farmers. Moreover, removal of 10 per cent surcharge will marginally aid urban income levels.
In terms of specifics, abolishment of FBT, no reversal of excise duty cuts and confirmation of implementation of GST by April 2010 come as a major relief for FMCG companies. No change in excise Duties on cigarettes has come as a huge benefit for ITC (factored in 5 per cent excise hike in FY2010E). Finally, the MAT rate has been increased from 10 per cent of Book Profits to 15 per cent, which is marginally negative for companies like Dabur and Godrej Consumer, which pay lower tax rates (due to facilities in excise-free zones), according to Angel Broking analysts.
Pinakiranjan Mishra, Partner & Industry Leader, Retail & Consumer Products Practice, Ernst & Young, concurs: "This means that a lot of the income in the hands of rural consumers and this will go towards buying consumer products."
"This year too, the volume growth from rural markets will be at 15-20 per cent, where as urban growth will be 8-10 per cent," says Anand Shah, FMCG analyst with Angel Broking and adds, "A concern currently is the monsoon as a weak monsoon would impact rural consumer spends."
Amit Burman, Vice Chairman, Dabur India, agrees: "Rural India accounts for almost 40 per cent of the industry’s sales. The government’s decision to extend the loan waiver scheme in view of the delay in monsoons and offer subsidised loans (at 6 per cent) for farmers who have paid their dues in time would put more money in their pockets. This move would go a long way in giving the rural economy and consumerism a big boost."
With the Budget supporting the rural economy, the challenge now, according to Vivek Gupta, senior vice president, IMRB International "is to enhance the distribution networks, increase penetration, get the consumers to buy bigger packs (get consumer loyalty) and introduce higher priced variants (get consumers to uptrade) as the rural consumer gets more experimentative."
FMCG players agree. For instance, Godrej Consumer Products (GCPL) plans to increase his income from the sector from 38-50 per cent over the next two years. The maker of Cinthol and Godrej No 1 soaps already has these soaps at price points of Rs 5 and now plans to launch more products at this price point. "We have plans to increase our distribution reach of small towns a 100 per cent from 3000 to 6000 and village reach from 17,500 villages to 50,000 over the next 2 to 3 years. Additionally we also are looking at increasing our colour brands footprint in the small towns as we take up barber activities," says Dalip Sehgal, managing director, GCPL.
Likewise for Wipro Consumer Care the rural growth is 1.2 to 1.3 times higher than that of urban India for the last 2 or 3 years. To reach the hinterland, the maker of Santoor has tweaked its marketing and communication strategies over the last couple of years. "There is no electricity and light cuts for over 8 hours at a stretch in villages. Hence we realised the best way to reach these towns is through wall paintings, radio and not television," says Anil Chugh vice president Wipro Consumer Care which has most of its products at price points of Rs 5 and Rs 6 including its diapers which it sell in packs of twos and threes.
The Budget also spells good news for ITC as there was no excise duty hike and this would translate into an additional 3 per cent volumes growth for its cigarettes business. "Besides as FBT gets abolished there will be a 1 per cent to 1.5 per cent increase in the earning per share of all FMCG companies. However as MAT is increased from 10 to 15 per cent it would impact the companies especially GCPL and Dabur," says Nikhil Vora, managing director, IDFC SSKI Securities.
