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Consumer goods firms to flow with the volume tide

Consumer goods firms to flow with the volume tide

Author | Source: The Economic Times | Monday, Jun 06,2005 7:40 AM

Consumer goods firms to flow with the volume tide

Consumer goods makers seem to be displaying more trust in the rain gods than the Indian meteorological department. Corporate chieftains in sectors like two-wheelers, tractors, FMCGs and durables do not see any cause for alarm and predict a 35-40% uptrend in volumes this year.

Corporate sources said that recently, the impact of the agricultural sector on industrial growth has been muted and other factors like base effect, interest rates and capital investments continue to be favourable. Industrial growth has improved over the past three years, despite a volatile pattern (from a drought in '03 to a bumper harvest in '04) recorded by the agricultural sector.

Adi B Godrej, chairman of the Godrej group, told ET that monsoon worries at the moment were unnecessary. “We have been recording a trend of delayed monsoons and therefore this deficit reading is ridiculous. I believe the readings of the Chicago Board, which is more accurate.

It reports regular monsoon trends. In fact, I expect very robust industrial and agricultural growth this year, which bodes well for the corporate sector” he said. Adds Atul Sobti, executive director of Hero Honda, “As yet there is no cause for concern. Even with a not-so-normal monsoon last year, the industry recorded a good growth. If the monsoon is not well spread out, the two-wheeler industry will still see 15-20% growth.”

In fact, the growth recorded by the FMCG industry in '04-05 was the highest, at 5-6%, in the last five years, following a sharp rebound in rural demand. The surprise is that the growth took place despite a less than optimal monsoon in '04-05. Agricultural production is expected to be closer to its all-time peak levels for the second consecutive year. Price realignments by industry majors have now begun yielding results across the consumer goods sector.

While 75% of the rural population is engaged in agriculture and contributes half of the total rural income, the 25% non-farm rural sector contributes the other half, making it the richer segment. This also means that monsoons don't exert the same kind of influence they used to on buying habits. Moreover, the income disparity between cities and the hinterland has been narrowing.

Also, over the past few years, there has been a more even spread of farm activity between the kharif (April-September) and rabi seasons (January-March).

According to BVR Subbu, director of Hyundai Motor India, the overall indications show positive volume growth.

“Overall demand is more urban-led across India. For example, markets in the South are dependent on IT and therefore not very monsoon-dependent,” he said.

There are new growth drivers that have emerged for corporate India. Sales numbers over the past five years show that the monsoon swings have not really swayed two-wheeler, commercial vehicle or consumer durable sales too much. For instance, commercial vehicle, two-wheeler and durable sales accelerated to robust double digits in '02-03, a year that saw the worst drought in recent years.

Analysts say monsoon worries stem from the slightly above-normal conditions pertaining to El Nino patterns. “The El Nino revival is usually associated with deficient rainfall and according to the Australian Bureau of Meteorology there is a 30-50% chance of an El Nino pattern occurring this year. However, the exact picture of El Nino monsoon threat will be clear only by June-end” said an analyst.

The “monsoon effect” has an impact on the demand for fertilisers and tractors, and to a lesser extent, on two-wheelers and consumer durables. But sustained trends in monsoon performance appear to be more important than above-or below-normal rains in a single year.

Two consecutive years of bountiful or deficient rain, invariably show up in the sales numbers for fertilisers and tractors. Monsoons also appear to have a strong delayed effect on two-wheeler sales, usually with a lag of one year.

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