South-west monsoon a new risk factor for FMCG stocks

Will the monsoon be an important factor for the consumer industry in the current fiscal year? Although good rainfall is vital for farming, changes in rural India’s economic landscape have reduced the monsoon’s relevance to consumption for many years now. 

 

 

Parts of rural India earn additional income from employment in local industry, remittances from migrants working in cities and government-sponsored employment schemes.

These sources are some reasons why the consumer goods industry has seen better growth rates in rural areas compared with cities and towns in 2013-14. However, these companies have also said rural demand too is decelerating, though not as rapidly as urban demand. That appears logical as a dull economy could have affected local industry as well, while industrial areas may have seen demand for labour decline.

 

 

In this backdrop, the effect of a bad monsoon acquires more relevance. With ancillary sources of income under threat, if a poor monsoon results in lower output, rural incomes could feel the heat. In turn, this could hurt demand for consumer products.

 

This is all in the realm of possibilities at the moment. The India Meteorological Department (IMD) has raised the probability of a below-normal rainfall. There is the possibility of an El Niño phenomenon that can affect seasonal rainfall in India. The signs are not encouraging. But this is not a call for investors to panic.

 

The forecast will be reviewed in June. After that, it’s important to remember that, rather than absolute rainfall, what matters more for agriculture is how well spaced are the showers in the monsoon months, and how well distributed they are over key crop-growing regions. It is only by July or August that a better assessment can be made. If the scene looks bleak then, there is still the government’s ability to step in with a relief package for farmers.

 

Thus, it is not certain that rural demand is going to take a hit because of poor monsoons. But it is also not a year when the monsoon can be dismissed as a non-event for the industry. Most companies have driven deep into rural markets to support sales growth.

A decline there can hurt them unless urban markets stage a revival. Investors in consumer goods stocks should add weather to their list of risk factors to watch in 2014-15.

 

Rahul kumar gupta

PGDM,1st Year

Source:-Mint