At a time when key FMCG companies are hopeful of a gradual recovery in rural demand, analysts believe El Nino impact could emerge as a key monitorable.

Leading FMCG firms, in the past few days, have said they have begun to see green shoots in terms of rural demand on the back of softening in inflationary pressures, expectations of good winter crop harvest and the government’s push towards infrastructure investments.

According to reports, the US government weather agency, National Oceanic and Atmospheric Administration, has predicted about a 49 per cent chance of El Nino impact on south-west monsoon between June-July 2023 and 57 per cent between July-September. Though experts have said more clarity will emerge only in April-May.

Rural slowdown

“In our view, the rainfall deficit that an El Nino year may present could derail recovery in rural FMCG. We have observed that rainfall deficit is one of the major factors that leads to rural slowdown. Pan-India rainfall in FY23 was about 6 per cent higher than long-term average. Yet, populous States such as UP, Bihar, Bengal and Jharkhand reported a deficit that affected paddy sowing,” said Abneesh Roy, Executive Director, Nuvama Institutional Equities, in a report.

For large FMCG companies, rural markets typically contribute about 30-40 per cent to domestic sales.

“On the bright side, farm incomes are improving and winter crop sowing has been healthy. The proportion of dip in rural volumes has started easing though still lower than urban volumes. A more reliable picture of what the El Nino phenomenon could entail would emerge only closer to April-May,” he added.

A report released by Crisil on Friday, also stated that the El Nino impact on southwest monsoon “remains a key monitorable” as it might impact rainfall for kharif as was seen during the previous strong El Nino year (2015).

According to Nielsen data, rural consumption saw a decline for the sixth consecutive quarter in the October-December period (-2.8 per cent compared to year ago period.)

Demand revival

Mayank Shah, Senior Category Head, Parle Products, said, “We are closely monitoring the situation but it’s too early to reach any conclusion regarding predictions on the El Nino impact. We are seeing good rural demand. In fact, rural demand has seen a revival since January and we expect rural demand trends to improve further.“

In an earnings call earlier this month, Mohit Malhotra, CEO, Dabur India, said, “We are seeing green shoots emerging in the rural markets. I think the winter sowing has been good and the income in the hands of the rural consumers will pick-up. And we see this rural and urban gap between growth actually reducing going forward. And I am pretty hopeful of a rural recovery in a couple of quarters.”