Consumer goods cos with a rural bias outdo urban peers

India’s rural economy, which suffered two back-to-back droughts (2014, 2015) and then the demonetisation shock in 2016, have either shown strong resilience or recovered smartly, if the performance of consumption-driven companies in the June 2017 quarter is anything to go by.

According to data provided by Capitaline, companies that derive substantial part or relatively higher share of their business from rural areas have done better in Q1 than their peers who are urban focused. Also, companies that are more domestic market-focused have outperformed their export-oriented peers. The higher the share of domestic or rural markets, the better has been the performance.

For example, Maruti Suzuki has done better than Tata Motors while Hero MotoCorp has reported better financial performance than Bajaj Auto in Q1 within the automobile sector.

The same is the case with Escorts, which has done better than M&M. According to analysts, rural markets form 40 to 60 per cent of sales for Maruti, Hero MotoCorp and M&M while Escorts gets about 80 per cent of revenues from tractors (mainly rural-oriented).

Tata Motors derives a majority of its business from the Jaguar Land Rover (85 per cent of consolidated revenues) while the domestic/ standalone business is incurring losses.

Bajaj Auto derives substantial portion of its revenues from exports. The share of exports to its sales shot up to 46 per cent in Q1 from about 36 per cent in FY17. Rural markets form 40-50 per cent of the domestic business volumes.

In the fast-moving consumer goods category, Hindustan Unilever’s financial performance has been superior to its peers (though smaller and into different categories) such as Godrej Consumer and Marico. Similarly, among paints companies, Kansai Nerolac and Berger Paints have reported better financial performance than Asian Paints.

An analyst from a mid-sized broking firm pointed that around 40 per cent of the India sales for consumer (including paints) companies come from rural or semi-urban markets. But the share of rural markets in the overall business would be relatively lesser for Godrej, Marico, Dabur and Asian Paints as they get 16-50 per cent of their business from overseas operations. Among the consumer durables industry, Whirlpool has done better than IFB Industries. An analyst from a brokerage-cum-NBFC said the share of rural/semi-urban sales of Whirlpool would be in the range of 25-30 per cent while it will be much lesser for IFB.

Among housing finance companies, firms such as Repco Home Finance and CanFin Homes which have relatively larger share of affordable housing (mainly the semi-urban kind) in total loans have bettered HDFC.

Motilal Oswal expects rural consumption to revive or recover further given the combination of positives such as normal monsoon, higher MSPs, farm loan waivers and higher government spending in rural areas. M&M, HUL, M&M Financial Services, Hero MotoCorp, Colgate-Palmolive, Crompton Greaves and Kaveri Seed are its top rural bets.

COMMENT NOW