Why tractors get all the love from rural India, but not Fmcg products

India’s rural population appears to be buying more tractors – a promising trend for the automotive space – but despite rising sales, pockets such as FMCG are still struggling. Sales trends in areas focused on the rural economy such as tractors and utility vehicles show improved demand, but not so much in the case of FMCG products.

This comes at a time when India’s official GDP growth reading for the January-March period hit its lowest level in a year, although in line with what most economists had expected.

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Typically, hopes of a normal monsoon and signs of a steady economic recovery lead to better drawdowns in pockets such as two-wheelers, cargo carriers, consumer staples and consumer goods. Big consumption.

Why do different businesses react differently to optimism about an improving rural economy?

Company Net sales
January-March 2022 Oct-Dec 2021 January-March 2020
Mahindra and Mahindra 25,934.4 23,594.5 20,182.3
Bajaj Auto 7,728.1 8,805.5 6,610.9
Eicher 3,140.2 2,880.7 2,190.3
MotoCorp Heroes 7,496.6 8,013.1 6,333.5
Ashok Leyland 9,882.4 6,627.4 5,088
TVS engine 6,585.2 6,597.4 4,104.7
Escorts 1,878.5 1,984.3 1,385.7
All figures in crore rupees
Source: Regulatory Filings

The net sales of most of the dominant players in the rural market have seen their annual sales exceed pre-pandemic levels in terms of value.

May 2022 sales volumes show that the commercial vehicle and agricultural equipment segments are doing better than comparable pre-COVID levels.

automakers, auto stocks

Although sales from FMCG players are also above pre-pandemic levels, pressure on margins – despite aggressive product price hikes – continues to haunt the industry. This stands in stark contrast to the automotive space, where most manufacturers beat Street’s estimates on the margin front.

Company Net sales
January-March 2022 January-March 2021 January-March 2020
HUL 13,490 13,223 9,078
ICC 17,754 18,365.8 11,678
Brittany 3,550.5 3,575 2,807.8
Tata Consumer 3,175.4 11,602 9,637.4
Dabour 2,517.8 2,941.8 1,865.4
Mario 2,161 2,407 1,496
Emma 770.4 971.9 532.7
All figures in crore rupees
Source: Regulatory Filings

“Strong tractor growth in May precedes the kharif season harvest, off a low base of 2021 due to COVID restrictions and subsequent lockdowns. There was an increase in sales volume in May, also boosted by the forecast from a normal monsoon,” Arijit Malakar, research-retail manager at Ashika Group, told CNBCTV18.com.

On the other hand, the FMCG industry is facing headwinds in the form of downtrading (consumer turning to cheaper alternatives of preferred products) due to price hikes and reduction weight.

Margin pressure from soaring raw material costs has forced most FMCG players to make a series of price hikes to pass on the extra costs to the consumer. This has impacted demand in the FMCG space, according to Malakar.

There may be another factor at play.

According to Deepak Jasani, head of retail research at HDFC Securities, the lower strata of the rural population still seem to be struggling, which is why the demand for FMCG products is not seeing the kind of uptick visible. in agricultural equipment and utility vehicles.

“If the monsoon goes as expected, we might see a faster recovery on the rural side. However, it might not be uniform across all segments of the population… FMCG sales depend on small volumes of packaging for a number of households, while tractor sales depend on the affluent rural population,” he said.

Jasani also pointed out that higher realizations from the sale of agricultural crops and expensive or poor availability of rural labor have resulted in increased demand for tractors.

“Farmers tend to buy tractors and agricultural equipment before the harvest season, which usually starts from June. That’s why April and May are the season for tractor sales… FMCG companies are likely to experience a spike in demand after the kharif season,” Malakar elaborated.

He thinks tractor makers are better off than FMCG companies given the expectation of strong retail sales over the next two months, a better realization of crop prices and expectation of normal monsoon rains.

First post: STI

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