Rural India shining, buying brands

Mon, 1 Apr Pre-Open

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A few years ago, when the economic landscape was not at its best, stocks across the board were being beaten black and blue. However, the fast moving consumer goods sector (FMCG) seemed to be defying gravity at the time. While it is amongst the few defensive plays that investors bet on during times of uncertainty, the then expensive valuations were being justified by expectations of strong growth. This growth was not expected from the saturated, increasingly competitive urban markets. But rather from rural markets! Investors would do well to recollect headlines such as 'rural India shining'.

The general belief was not only that the rural India story is intact. But also would tend to be the new growth driver of the Indian economy. While it may still be time before the latter happens, it definitely is the case with the FMCG pack.

As reported by the Economic Times, demand for FMCG products has moved on from the traditional soaps and detergents segment to the other segments. Some of these include branded juices, diapers, feminine hygiene related, malted drinks, fairness bleaches, amongst others.

It may be noted that efforts towards increasing the share from rural markets have been going on for a while. But the presence of such products has increased from being at negligible levels about two years ago to being highly acceptable amongst rural households.

An example to put things in perspective is of rural diaper sales. The same is believed to have been increasing at a pace of 150% over the past two years. Currently, the demand from rural markets forms close to 15% of the overall demand. Further, the rural sanitary napkin category is believed to have grown at the pace of 74% over the past three years. Revenues from this segment stand at about almost Rs 3.7 bn.

The FMCG companies' strategy of lowering price points by increasing more stock keeping units or SKUs seems to have been one of the key factors leading to this change. Not to mention the increase in income levels of rural India. Also, the fact that FMCG companies have been expanding their reach by increasing their distribution - eventually leading to product availability in such markets - also contributed towards higher contribution from rural markets.

All is well! But...

With such efforts on part of the FMCG companies, it only adds to their overall strengths. Getting a brand name accepted in the hinterlands of India is very difficult to do. Having strong presence in such markets is a feat that cannot be replicated by many and as such only adds to their moats. Having said that, investors would do well not to blindly follow such a theme or story and buy stocks from the space without taking the stocks' valuations under consideration.