What Hero Moto and Adani Wilmar tell us about rural demand
Two results announced by two different companies in two different sectors managed to tell the same story. While one was a Ludhiana based automobile company and the other a Gujarat based FMCG company, the theme of the story is the same. The rural demand has been rapidly slowing and that is hitting the top line volumes and the bottom lines quite hard. Both Hero Motocorp of the Munjal group and Adani Wilmar of the Adani group rely heavily on robust rural demand to see their sales growth on a consistent basis quarter after quarter. But things have changed for the worse this time around.
What exactly has gone wrong with the rural economy. Actually, there are 3 problems that have hit rural demand in a big way. Firstly, the erratic agriculture in the latest year due to uncertain rains and the rising input costs have put farmer incomes under a lot of pressure. Despite higher MSPs, farm incomes were under strain. Secondly, rural inflation has been consistently higher than urban inflation, especially food and core inflation. That has hit rural demand. Lastly, spike in the cost of funds has made rural credit hard to come by and the higher credit costs is hitting the purchasing power of rural India. That is the broad story.
The impact was visible in the latest quarter numbers of Hero Motocorp. Net profits for the Q2FY23 quarter fell by 8.63% on a yoy basis to Rs682.28 crore. However, pricing power had helped the top line sales for the quarter to rise by 6.4% at Rs9,252 crore. Most of the sales growth came from price increases, even as volumes remained tepid and rural volumes actually took it on the chin. To address this issue, Hero Motocorp is focusing on financial discipline, cost savings, smart capital allocation and also focussing on premiumisation of its portfolio of two wheeler offerings to its customers for the sake of improved margins.
However, the management of Hero Motocorp continues to remain confident on various counts despite the pressure on rural demand. For instance, they are consistently building presence in the premium segment through multiple launches. Even though the macro headwinds like inflation, recession concerns and cost of funds may keep a lid on growth, there is still room for hope. The Hero Motocorp management expects that as the prices of global commodities cool off and the rate cycle reaches its peak, things could change for the better in terms of outlook. Hope has always been a good breakfast but a bad supper.
The rural slowdown story also played out in the case of Adani Wilmar, the FMCG franchise of the Adani group, which had recently got listed reported a 73% fall in second-quarter net profits at Rs48.76 crore. It had reported a net profit of Rs182 crore in the year ago same quarter. Here again, the challenge was not just the cost aspect but also the factors like dull demand from rural areas and the industry-wide input cost inflation. Adani Wilmar is a joint venture between the Adani Group and Wilmar Group of Singapore. While revenues were up 4% yoy, the total expenses were up 6% yoy. The fall is acute in its mainstay of edible oil.
In the edible oils segment, a major chunk of the demand comes from the rural segment where the demand for refined edible is almost like an aspirational product and is a sign that income levels are improving in rural areas. That has turned for the worse in the current quarter. It has been a combination of high inflation, delayed monsoons and tepid rural demand. However, Adani is not alone. Even other FMCG players like Nestle and Colgate Palmolive that have a strong rural franchise have complained that apart from the input costs, even weak rural demand has hit their numbers quite badly.
Across rural households, a new trend is taking shape. A large number of stressed and cash-strapped rural households are deliberately and consciously opting for cheaper unbranded alternatives commonly sold in mom-and-pop stores. They are preferring unbranded products and also smaller package denominations to reduce their buying cost. This is despite the fact that companies like Adani Wilmar have lowered prices to cater to the rural market. Clearly, the aspirational demand is missing and that is the crux of the problem for companies like Hero Moto and Adani Wilmar as they cater to rural demand.
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