Rural Economy Subdued But Showing Signs Of Revival: Q3 Earnings Commentary
Rural economy though showing signs of recovery is still in the woods as farm incomes were hit by erratic monsoon and high inflation.
While high-frequency indicators continue to paint a mixed picture of the rural economy, earnings commentary by several Nifty 50 companies shows that rural sentiment remains subdued, with incomes hit by erratic monsoons and high inflation.
However, some companies did report signs of revival, with a few reporting improved rural contribution during the festive season. To be sure, recovery is still in the woods, warranting close monitoring.
Rural Consumer Sentiment Subdued
The effect of uneven monsoon was felt on the Kharif crop output impacting agricultural yields and rural incomes, Rohit Jawa, chief executive officer and managing director at Hindustan Unilever Ltd. said. Lower reservoir levels and delayed winters have impacted the winter categories, he said. Due to lower agriculture yields and uncertainty about future crop outputs, rural consumer sentiment remains subdued, Jawa said. Consequently, the anticipated buoyancy from the festive season did not materialise, he said.
"The dualism we've seen in the recent past continues, with certain parts of the market recovering faster than the rest," said Jawa. "Urban growth continued to outpace rural growth across many industries; we see premium segments doing better than mass," he said.
Hopes On Consumption Revival
"We've not seen rural growth the way we've seen it in the last 10 years," Varun Berry, vice chairman and managing director at Britania Industries Ltd., said. Urban growth is outpacing rural growth, he said, adding that the company continues to build its rural distribution "despite the fact that we are not getting the kind of traction that we were thus far".
"I think the time is now coming where we will hopefully get to higher volume growth because it's been inflation that has been overtaking all of our efforts in the last two or three years," said Berry. The aspiration to get back to double-digit volume growth will not happen in the next quarter or so, "but we are moving towards that," he said. "And clearly, there seems to be consumption coming back," he said. Obviously, the economy, the stock markets and all of that seem to be moving in the right direction. There's no way that consumption is going to lag so much.
On The Mend
The farm industry has been tough and is expected to be down 5–6% this year, said Anish Shah, managing director and chief executive officer at Mahindra & Mahindra Ltd.
The rural economy is not having the best time, but there are positives and negatives, said Shah. One key driver of the rural economy is the government spending index. According to an internal index by the company, which looks at all the spending that happens in rural areas, "we can see that curve moving up a little bit, and hopefully that for us is a good indicator when you start seeing buoyancy," said Shah.
Terms of trade turing positive is a positive news, he said. Output inflation is 6%, and input inflation is 3%. So, there are 3% positive terms of trade, which is normally a very good sign of farmer sentiment.
Signs Of Recovery
While rural was showing some stress in the last quarter, in this quarter some of the T3 and T4 markets have recovered, possibly showing early signs of recovery as far as growth rates are concerned, said Amit Syngle, chief executive officer and managing director at Asian Paints Ltd. The company classifies urban and rural areas in terms of T1, T2 cities and T3, T4 cities, respectively.
"We see almost equivalent growth rates happening in T1, T2, and T3, T4 cities," he said. The other highlight is that, because there's a recovery in T3, T4, there has definitely been a surge in the growth of the economy's range of products, he said.
On the outlook, he said that volume momentum is expected to sustain. Because the elections are coming, there will be excess money coming into the market. There would also be a little bit of lethargy in terms of painting homes and some deferment, which could come in, he said, but T3 and T4 cities are showing an uptick, which indicates possibly good growth coming from that side. "We expect the raw material prices to be coming down further, despite all the geopolitical and other things that are happening, and we expect that trend of material deflation to continue to some extent in Q4 FY24 as well," he said.
Rural Growth To Pick Up?
Hero MotoCorp Ltd. sees positive signals emanating from the rural sector and expects the growth to pick up in the coming quarters from that segment, said Niranjan Gupta, chief executive officer at the two-wheeler maker. "If you look at it in the festive season, for instance, we had a higher contribution coming from rural versus urban if you compare to the preceding few months, and even if you look at the latest, the inquiries that we track—for instance, overall, the mix of the inquiries, if you see—would be around 40% coming from rural and 60% from urban."
"It's not just about the top end of India, which is growing; you can see the aspirations of people growing. At the bottom of the pyramid, the heavy capex spend, digital inclusion that's been happening, the hospitality industry that you can see clearly, which is lifted up, is actually lifting the sentiment of the consumers at the bottom end."
