India's rural population appears to be buying more tractors — a promising trend for the auto space — but despite rising sales, pockets such as FMCG are still struggling. Sales trends in rural economy-focused areas such as tractors and commercial vehicles show improving demand, but not so much in case of FMCG products.

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This, at a time when India's official GDP growth reading for the January-March period has hit a one-year low, though 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 offtake in pockets such as two-wheelers, goods carriers, consumer staples and FMCG products.

Why are different businesses responding differently to optimism about an improving rural economy?

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

Sales volumes of May 2022 show the segments of commercial vehicles and farm equipment are looking better than comparable pre-COVID levels.

Though sales of FMCG players are also above pre-pandemic levels, margin pressure — despite aggressive hikes in product rates — continues to haunt the sector. This is in stark contrast to the auto space, where most of the manufacturers beat Street estimates on the margin front.

"The strong growth in tractors in May comes ahead of kharif season harvesting, on a low base of 2021 due to COVID curbs and subsequent lockdowns. There has been uptick seen in sales volume in May, also boosted by the prediction of a normal monsoon," Arijit Malakar, Head of Research-Retail at Ashika Group, told CNBCTV18.com.

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

Margin pressure due to a surge in raw material costs has forced most FMCG players to take a series of price hikes to pass on the additional costs to the consumer. This has impacted demand in the FMCG space, according to Malakar.

There may be another factor at play.

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The lowest strata of the rural population seems to be still struggling, which is why FMCG demand is not seeing the kind of uptick visible in farm equipment and commercial vehicles, according to Deepak Jasani, Head of Retail Research at HDFC Securities.

"If the monsoon plays out as forecast, we could see a faster recovery from the rural side. However, it may not be uniform across population segments... FMCG sales depend on small pack volumes to a number of households while tractor sales depend on the better off rural population," he said.

Jasani also pointed out that higher realisations from the sale of agri crops and the costly or low availability of rural labour have resulted in higher demand for tractors.

"Farmers tend to purchase tractors and farm equipment ahead of the harvesting season which usually starts from June. This is why April and May are the season for tractor sales... FMCG companies are likely to witness a demand uptick after the kharif season," Malakar elaborated.

He believes tractor makers are better placed than FMCG companies given the expectation of strong retail sales in the next two months, a better crop price realisation and the prediction of normal monsoon rainfall.

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First Published:Jun 7, 2022 7:01 AM IST