Is it the right time to buy FMCG stocks?

Above normal monsoon forecast should aid rural demand

Published 8 years ago on Jun 06, 2016 1 minute Read

 UR Bhat, director, Dalton Capital Advisors

After two droughts, rural consumption is in bad shape. We have an acute water crisis. Even if we have a normal rainfall post June, demand won’t revive immediately. It will probably take over a year for the soil to regenerate and farmer incomes to reach normal levels. Thus, the notion that FMCG companies will see a spike is unrealistic. Moreover, valuations are expensive for the anemic earnings growth we have seen in the FMCG space. While euphoria is being created around the monsoon, it can’t bring about immediate turnaround after two successive years of bad monsoon. In fact, there is a possibility of de-rating if in July/August, it comes out that the spatial distribution is bad. If large areas see deficient monsoon and some geographies see too much rainfall, it would have a negative impact on rural demand.

Ambareesh Baliga, independent market expert

The FMCG sector is mainly driven by rural and semi-urban demand as the urban markets are saturated. While monsoon affects the entire economy, the impact on rural India is more as it is dependent on farm income, which is driven by the vagaries of the monsoon. Over the last two years, monsoon has played spoilsport, affecting the purchasing power of rural consumers, and resulting in disappointing volume growth. A poor monsoon also leads to increase in food and input prices, resulting in inflation and demand slowdown. With good monsoon predicted this year, demand from rural India should improve. Besides, the implementation of the Seventh Pay Commission, direct benefits transfer and OROP should drive consumption. I see the ayurvedic/herbal market expanding multi-fold as the consumers are increasingly getting aware of the same with the entry of Patanjali. Going ahead, ayurvedic/herbal players such as Dabur and Emami are likely to benefit due to the rub-off effect.