- 03 Sept 2024
- 5 mins read
- By: BlinkX Research Team
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What happened to rural demand?
When it comes to giving a first-hand account of rural inflation, few companies have their ear to the ground as Hindustan Unilever has. In the March 2023 quarter, India’s FMCG market saw growth being driven primarily through urban areas; and this is something even the Unilever chief confirmed. The earnings from rural areas have been lackadaisical, leading to Hindustan Unilever Limited (HUL) delivering inferior sequential growths as compared to analyst expectations. But what factors have led to rural areas not showing the ubiquitous buoyant behaviour exhibited by its urban counterparts?
Table of Contents
Rural volumes were far from impressive
For the March 2023 quarter, HUL reported 13% higher net profits at Rs2,601 crores while total sales grew 11% at Rs14,953 crores. EBITDA margins stood at 23.7%, which is down 90 bps. According to Sanjiv Mehta, CEO and MD, the numbers indicate a year of fortitude and resilience amid inflationary pressures and fears of recession. However, volume growth was heavily muted at 4% for the quarter, as rural customers looked to cut down on spending or preferred even unbranded products to deal with inflationary pressures. HUL accounts for 12% of Unilever global sales and is a priority market for the conglomerate.
Blame it on weak agricultural output last year
The tapering of rural consumption can be mainly attributed to a four-quarter-low growth in real agriculture Gross Value Added (GVA). That is evident from cereals inflation. Also, the persistent ebbing in non-agricultural wages and a sharp slowdown in 2-wheeler sales were indicators. These imply a higher price for raw materials like diesel, fertilizers etc being levied upon farmers than the sales they generate out of such products. However, year 2023 is hopefully going to be a better year for Indian agriculture.
Farmers squeezed by input inflation
On the climate front, winter rainfall is especially useful during the Rabi season but there are concerns of El Nino during the Kharif season this year and that is making farmers wary. Also input costs have gone up 24% yoy while the growth in MSP is just about 9% yoy, creating a painful gap. As a result, farmers are playing on the backfoot and taking a very defensive “park the bus” approach to their finances amid soaring inflation and recession fears. They have perhaps taken heed to the Joker’s celebrated dialogue, “I am not a mad man… I am just ahead of the curve.”
Let us look at the positive side of the story
The continuous rounds of hawkish interest rate policies by the RBI managed to stagnate inflation, although the extent of that is still a mystery. This will serve as a morale booster for rural citizens, as it could alleviate some financial stress on the farmers. The headwinds hopefully will not last long, as experts remain bullish on the immense growth potential which rural markets offer. With the Union Budget focusing on job generation, capability development and infrastructure amelioration you could see a rural multiplier effect soon.
What can be done?
However, there could be some ways the government can also help those depending on rural demand. The government should ideally focus on providing crop insurance schemes and leveraging modern farming technologies, given the volatile nature of monsoons in India. India also faces one of the highest post-harvest losses, so there must be a focus on developing low-capacity warehouses and micro cold storage for reducing wastage of produce. Lastly, the expediting of 5G will help catalyse the adoption of agri-tech methods and generate further opportunities in rural India.