Rural demand to weaken on high farm costs, deficit monsoons: Enam Securities

MUMBAI: Enam Securities in its latest report on rural consumption suggests weakening of rural demand due to rising farm costs, poor monsoons and weakness in services growth.

Agriculture, which contributes half of the rural income, is becoming unprofitable for majority of farmers having small land holdings, as costs of inputs like fertilizers and diesel have risen far more than the incomes (MSPs).

The NREGA has adversely impacted both availability and cost of labour. Despite rising income, high inflation has led to a rise in share of food in the rural wallet - for the first time in last several years.

As a result, rural demand (constituting around 35% of the FMCG market) is expected to be weaker relative to the last year.

According to the report, there is down trading visible in discretionary and non-discretionary categories of consumer products.

In case of automobiles, inventory levels have been found to be high across segments - especially tractors and two wheelers. The slowdown in demand is visible, but is expected to show up post harvest season.

In view of this finding, the companies earning a significant portion of their earnings from rural India are likely to face an adverse performance in their September quarter.

Investors must watch out the September quarter performance of most FMCG companies like HUL, Dabur and Marico as well as two-wheeler companies like Hero Honda and Bajaj Auto for signs of slowdown in revenues from their rural markets.