The third quarter of FY23 is expected to bring good news for FMCG companies in terms of growth in rural demand. Rural demand which was always growing higher than urban has been reporting degrowth in the past few quarters due to inflationary pressures. On the back of monsoons being above normal in 65% of the states, a vibrant festive season and good harvest, FMCG companies are expecting an ease in margin pressures. However, a recent report by Nuvama Institutional Equities says that demand in rural markets would continue to remain weak in Q3FY23. "In our view, this is almost entirely due to base effect as the rural slowdown started in H2FY22. Lower-end of the rural job market seems to be improving, but these are early days and sustainability is needed. General inflation and rainfall deficit in populous states like UP, Bihar, Bengal and Jharkhand remain key challenges," says Abneesh Roy, head, research committee, Nuvama Institutional Equities.

"In our view, FMCG sales are to be viewed on a year-on-year basis, rather than month-on-month. Often, the month-on-month reflection carries false signals, given the seasonality in demand (based on weather/festivals) and trade promotions/sales campaigns. With start-up capital drying up, we also expect listed consumer players to dominate D2C," Roy further explains. Most D2C brands operate in the premium space and are hence a higher margin business.

The Nuvama report, however, expects green shoots in rural demand in FY24. "Sharp price hikes by FMCG companies including grammage cuts, have optically hurt volume growth. In coming quarters, we expect some companies to start reversing it, which will aid volume growth. Inflation has been sweeping across categories - fertilisers, travel, medical etc. However, aided by government tax cuts and easing commodities, this could be a positive development in coming quarters. Base for rural demand will start to become favourable."

"Previous rural slowdowns were due to demonetisation, liquidity crunch for wholesale and weak monsoons. None of these issues are currently present/big, lending credence that in FY24, we could start seeing green shoots for recovery in rural demand for FMCG," according to the report.

In fact, rural India contributes around 36% (due to lower per-capita consumption) of consumer goods companies' revenue, but it accounts for two-thirds of India's population. This means that a large part of the rural market is underpenetrated, leaving ample growth opportunities for FMCG companies. Companies still have a way to go in terms of expanding their reach in rural India apart from adding more low unit packs at price points Rs 1 - Rs 10. Even large companies such as HUL, Britannia and Colgate earn just 40% of their revenue from rural India. This explains why Nadir Godrej, MD, Godrej Industries, and chairperson, Godrej Agrovet, is confident about rural demand bouncing back. "We have had a lot of challenges in the global economy, but India seems to be less affected. India's inflation is also lower than other developing countries and there is a structural difference in India's inflation. It's not push inflation as it is there in many of these countries, so it's not necessary to suppress demand to bring down this inflation. It is more important to increase supply," Godrej said in a recent interview with Fortune India.

Follow us on Facebook, Twitter, YouTube & Instagram to never miss an update from Fortune India. To buy a copy, visit Amazon.