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Summary of India Consumer Report

Core Content

This report analyzes the current state of rural consumer demand in India, focusing on the impact of monsoon conditions and the performance of key FMCG companies. Field visits to Raipur and surrounding villages, along with interactions with dealers and distributors in five states, reveal a sharp decline in rural demand over the past 3-6 months due to two consecutive years of poor monsoons. However, rising aspirations among rural consumers, driven by increased TV penetration and advertising, are expected to aid a faster recovery once favorable monsoons return in 2016.

Main Points

• Rural Demand Decline: Rural demand has significantly weakened over the past 3-6 months due to poor monsoons, leading to a 20-30% YoY drop in sales. Small retailers are facing working capital issues due to extended receivable days.
• Monsoon Impact: A favorable monsoon in 2016 is expected to improve rural income and consumer sentiment, thereby boosting demand across various FMCG categories. The report suggests that a normal monsoon will lead to a recovery, while a third consecutive poor monsoon could worsen the situation.
• Key Companies Performing Well: Companies with strong innovation and flexibility are expected to outperform. These include HUVR, ITC, BRIT, and JYL. HUVR is noted for its aggressive price cuts and product upgrades, while ITC and BRIT are expected to benefit from improved demand in biscuits and packaged foods.
• Market Share Shifts: Patanjali is gaining traction in the urban market, particularly in toothpaste and hair oils, affecting brands like CLGT and DABUR. However, DABUR's recovery in rural markets is seen as difficult.
• Sector Outlook: The sector view has been upgraded from Negative to Neutral, with a focus on demand recovery over the next two years. The report recommends BUY on ITC, BRIT, and JYL, while downgrading CLGT and DABUR to SELL and upgrading HUVR to HOLD.

Key Insights

• Monsoon as a Key Driver: Monsoon conditions are critical for rural demand and income, especially in agriculture-dependent regions.
• Rising Aspirations: Improved consumer sentiment due to better advertising and TV penetration is expected to drive demand recovery.
• Product Innovation and Distribution: Companies that have invested in product innovation and expanded distribution channels are better positioned to capitalize on the recovery.
• Favorable Monsoon Impact: The report anticipates volume growth in FMCG categories such as decorative paints, packaged foods, and home and personal care, with specific growth projections for FY17 and FY18.

Top Picks

• ITC: Expected to benefit from the recovery in demand, particularly in the premium cigarette segment. Revenue growth is projected at 12% YoY in FY17 and 13% in FY18.
• BRIT: Aggressive expansion of distribution channels and improved rural income are expected to drive revenue growth of 16% in FY17 and 19% in FY18.
• JYL: Competitive pricing and expanded distribution channels are expected to support its performance, with a BUY recommendation.

Key Takeaways

• 1. Rural sentiment is muted and monsoon holds the key: Poor monsoons have led to a decline in rural demand and income.
• 2. Favorable monsoon will drive rural income, demand: A normal monsoon in 2016 is expected to boost rural consumption.
• 3. HUVR has restricted competition and will benefit from a demand recovery: Proactive price cuts and product upgrades have helped HUVR maintain its position in key categories like soaps and detergents.
• 4. Ayurveda platform affecting CLGT, aiding DABUR: Ayurveda-based products are gaining traction, especially in toothpaste and hair oils.
• 5. MRCO's dominance to increase, DABUR's recovery difficult: Marico is gaining in the hair oil segment, while Dabur faces challenges in regaining market share.
• 6. BRIT and ITC to outperform in packaged foods: Both companies are expected to benefit from the recovery in demand for biscuits and instant noodles.
• 7. Tier 2-3 cities aiding cement and decorative paint demand: Urbanization and home improvement activities are boosting demand for construction-related products.
• 8. Organized cigarettes witness a volume recovery: Cigarette companies are experiencing a rebound in sales due to improved consumer sentiment and reduced price increases.
• 9. Portions of Patanjali's businesses are strong: Patanjali is performing well in certain segments, particularly in urban markets.
• 10. Rising aspirations to aid rural demand and increase penetration: Higher income levels and improved sentiment are expected to drive demand in rural areas.

Key Companies and Recommendations

Conclusion

The report highlights that while rural demand has weakened due to poor monsoons, there is a strong indication of recovery once favorable conditions return. Companies with robust strategies in innovation, distribution, and pricing are expected to lead the recovery. The outlook for the sector is cautiously optimistic, with a focus on the potential for growth in the coming fiscal years.