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Rural Consumption Saves the Day 👨🏻‍🌾

The markets have been under pressure for the last month. Last week too, the markets were down by 2%. Mid and small caps got battered even more, with them being down 3% and 4% respectively.

But in the face of this, where overall sentiment is pessimistic, one sector did surprisingly well - FMCG, with the index rising by 2% in the last week. Marico was the top performer in the Nifty FMCG index, with it rising by 13% in just a week.

Giants like HUL, Britannia, Godrej Consumer Products were up by 5-7%. The entire consumer pack was driven by one factor - a rise in rural demand.

What’s Happening?

For the first time in nearly three years, the growth in sales of FMCG goods in rural areas surpassed that in cities.

As per a report by Neilsen IQ, rural markets saw a consistent volume growth of 6.5% in both December 2023 and January 2024, followed by a notable increase of 11.1% in February.

Conversely, urban markets experienced a growth rate of 6.1% in December 2023 and 4.7% in January 2024, and a rise to 8.7% in February.

Until November 2023, rural demand, along with underperforming urban markets, had been dampening overall growth for several years. The last time villages outpaced cities in FMCG sales expansion was in March 2021.

Why Is This Happening?

Over the past two years, markets worldwide were marred by inflationary pressures. Consumer companies were some of the hardest hit - with cost pressures arising on all fronts - raw materials, energy, packaging and even transport.

However, in the last few months, due to aggressive rate hikes by central banks world over, inflation has trickled down, resulting in price cuts by companies.

Additionally, over the last few months, wages in rural India have been on a rise, at levels that are higher than inflation. This increase in real wages has boosted purchasing power, further propelling rural demand.

The confluence of these factors can also been seen in the lower demand for work under MGNREGA, which has become a fallback option for rural workers. Data suggests that the number of households seeking work under the scheme has actually declined to 1.8 crore in March 2024, compared to 2.3 crore last year.

Why Should You Care?

Rural demand accounts for 40% of the FMCG demand, and makes for a lot of incremental potential given increasing penetration, awareness and changing lifestyles.

Most of the major FMCG companies in their 4QFY24 results commentary have guided for double-digit growth in volumes in FY25 on account of encouraging signs in rural demand.

The timing of the rural bounce-back, and subsequent upping of growth guidance comes in the backdrop of an already battered sector, fears of high valuations in the rest of the markets, and an easing of the rally that had been seen over the last year.

The combination of high growth, with greater visibility provides for a good safe space in FMCG stocks during these choppy times.

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