Concall Commentaries from Consumer facing Companies
In this edition of TOPICAL Wednesday, let’s understand the reason behind high rural demand and what major companies are saying about it.
In the past couple of months, have you felt the pinch of high prices when buying groceries or other essentials? Or did you wait for the festive season to take advantage of heavy discounts on electronics, vehicles, clothes, etc.? Have you noticed that housing costs have recently skyrocketed? If your answer is yes, you’re not alone—this has been the case across India, and its effects became evident in the Q2FY25 results of India Inc. As the earnings season comes to a close, one thing is clear: consumer demand was notably absent in Q2FY25, primarily due to a slowdown in urban areas.
If you look at the earnings calls of listed consumer-facing companies—whether in FMCG, consumer durables, autos —you’ll see that most of them reported a slowdown in urban demand, particularly in metro cities. This trend affected all industries, with the Index of Industrial Production (IIP) recording a 22-month low with a 0.1% contraction in August 2024. Consequently, many economists have revised their GDP growth forecasts for FY25 downward.
(We’ve previously covered this phenomenon in one of our newsletters. For a more detailed, be sure to check it out here.)
However, the saving grace this quarter was strong rural demand, which helped many companies avoid worse performance. This surge in rural consumption became a crucial factor in stabilizing results across sectors. So, the key point I want to highlight is why rural demand became so prominent and, what could be expected in the future.
But before diving into that, let’s first understand the main reasons behind the slowdown in urban areas.
Reason for Slowdown in Urban India
High Inflation – The main driver of the slowdown in urban demand was high inflation. While inflation, measured by the Consumer Price Index (CPI), remained within the RBI’s comfort zone in July and August 2024 at 3.54% and 3.56%, it spiked to 5.49% in September. This surge was largely due to a sharp rise in food prices, especially vegetables, caused by unseasonal rains and heatwaves that disrupted crop yields.
The Consumer Food Price Index (CFPI), which tracks food price changes, jumped to 9.24% YoY, and the situation worsened in October with CFPI hitting 10.87% and CPI rising to 6.21% due to higher prices for vegetables, fruits, and edible oils.
(Source: PIB)
This spike breached the RBI’s inflation target range of 4% ± 2%, making it unlikely that the RBI will cut interest rates in its upcoming December meeting. As a result, borrowing costs will remain high for the foreseeable future, further dampening consumer demand.
Stagnant Wages – Wage growth, when adjusted for inflation, remained low, especially for urban workers. Minimal salary increases, combined with rising prices, reduced the purchasing power of middle- and lower-income groups.
Fading Pent-Up Demand – The post-COVID surge in demand that had been driving growth started to fade by mid-2024. Many consumers had already made big purchases in previous quarters, leading to a natural slowdown in demand for items like consumer durables and cars.
Shift to Festive Season – With high interest rates making loans more expensive, many consumers postponed large purchases, waiting for the festive season to take advantage of discounts and offers.
All these factors combined led to a decline in consumer sentiment in urban areas. Normally, you’d expect these same issues—like inflation and stagnant wages—to affect rural areas and smaller cities as well, since they are part of the same economy. However, rural demand moved in the opposite direction, showing resilience and even growth.
Reasons for Higher Rural Demand
Favorable Agricultural Conditions – Rural areas, especially Tier 3 and 4 towns, rely heavily on agriculture. After years of uneven rainfall, 2024 saw above-normal monsoon with 108% of the Long Period Average (LPA) by September. This boosted Kharif sowing by 1.5% YoY, leading to strong crop yields in key crops like pulses, rice, and cereals. A good harvest increased farmers’ income, directly improving their purchasing power and driving demand for goods and services.
Higher Minimum Support Prices (MSP) – The government raised the MSP for Kharif crops, ensuring farmers earned more for their produce. This provided rural households with additional disposable income, further boosting spending.
Government Support – Several state governments introduced cash transfer schemes for women, providing monthly payments of Rs. 1,000 to Rs. 2,000. Additionally, increased funding for rural welfare programs like MGNREGA helped support rural incomes. These initiatives put more money into the hands of rural households, increasing their ability to spend.
For the past two years, while urban India thrived, rural India struggled due to tough economic conditions. However, in 2024, multiple factors aligned to improve the rural economy. As urban demand slows down, rural demand is bouncing back after being suppressed for so long—an effect visible across various industries.
Sector wise update
1. FMCG
According to Nielsen IQ data, rural demand for FMCG sector grew by 6% in Q2FY25, outpacing urban demand growth of 2.8%. This marked the third consecutive quarter where rural volume growth exceeded urban growth.
This is what management of multiple companies have to say:
Britannia – “But I think that’s our big muscle, and it’s — the rural is coming back slowly. So as rural starts to come back to the kind of double-digit growth that we were seeing in the past, I think we should be in a good place.”
HUL – “We see the growth in big cities trending down, although in smaller cities and in rural the growth continues to be good. So this is a trend that we observed…we must not forget that in the recent quarters, urban was doing the heavy lifting, and now it’s rural that’s coming back slowly. There could be a certain degree of base effect.”
Marico – “And lastly, in rural, there is a gradual improvement in demand sentiment which has been aided by above-normal monsoons, sustained government spending through MSPs and free food grain schemes. Looking ahead, this pattern and trajectory of demand should help in sequential improvement in our volume growth.”
2. Automotive
2-Wheeler – Rural markets have outpaced urban in 2W sales growth for the first time since the pandemic, with executives at 2W companies noting signs of a rebound in rural discretionary spending.
Cars – Maruti Suzuki and Newly listed Hyundai Motors India have reported stronger rural sales growth compared to urban markets in the past months as urban consumption have slowed down due to inflationary pressure.
This is what management of multiple companies have to say:
Hero Moto Corp – “We are seeing green shoots (in rural areas), and moving forward, we do see positive momentum.”
Uno Minda – “Moving to current quarter. The festival season saw a strong growth across all segments, with rural outpacing the growth in the urban market.”
3. Electronics – This one shows the quality of demand in small towns.
Electronic Marts India Ltd – “Yes. it would be around a similar range, but acceptance of these brands is going up day by day. Even in our Tier 3, 4 towns, acceptance of, say, an Apple device or a Samsung television. So the customers even in entry level, say, direct-cool refrigerator or semi-automatic washing machine, air conditioners. Now people are preferring for bigger brands and better brands across categories.”
Closing Thoughts
Rural demand is making a comeback, supported by government initiatives, and it looks promising for the near term at least—unless poor rainfall disrupts it again. On the other hand, urban demand could recover once inflation is under control, which remains the RBI’s main focus. As inflation eases and reaches the target level, we may see an improvement in consumer sentiment.
While Q3 FY25 is expected to show strong performance due to the festive season, high demand may not sustain beyond that. As a result, GDP growth expectations for FY25 have been revised down from 7.0% to 6.5%, based on the results from H1 FY25.
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