Can El Nino derail the rural recovery and hit FMCG firms?

There is a possibility that India witnesses intense heat waves and a monsoon deficit in 2023 due to El Nino.

While it is an early prediction, media reports suggested International meteorology experts have warned about the El Nino effect on monsoon in India.

As per a Hindustan Times report, Australia’s Bureau of Meteorology and weather scientists from the United Kingdom and the United States of America have warned of the El Nino effect.

El Nino is a climate pattern that explains the warming up of ocean temperatures over the tropical eastern Pacific. It is usually accompanied by intense climate changes and causes rainfall deficits in countries like India.

Monsoon is a crucial factor

Monsoon is a crucial factor for the Indian economy. India gets around 70 percent of its annual rainfall in the monsoon season only.

The output of the Kharif crop, which accounts for nearly half of the country’s annual food supply, significantly depends on the monsoon. it is crucial for rabi crops also since it determines the groundwater and water reservoir levels.

Not only agriculture, even industries and households significantly depend on the monsoon rains.

Since Indian agriculture is heavily dependent on the monsoon, a deficit in rainfall due to the El Nino effect has the potential to derail the rural recovery and hit the consumer goods sector.

It also poses a risk to the efforts for curbing inflation since it can give rise to food-based inflation.

"An El Nino year has surfaced to rear its head just as a plethora of rural issues are being hammered out with the help of easing inflation, government’s free foods policy extension and bumper crop expectations. With this, the probability of India’s landscape receiving a normal monsoon is now on the anvil," said brokerage firm Nuvama Wealth Management.

Will FMCG firms experience heat?

Even though Nuvama Wealth said that a more reliable picture of what the phenomenon could entail would emerge only closer to April-May, it underscored that the rainfall deficit that an El Nino year may present could derail the recovery in rural FMCG.

As per the brokerage firm, rural India constitutes nearly 36 percent of the sales pie for a typical consumer company and is a big focus area given the much lower per-capita consumption.

Almost 50 percent of total sales come from the rural market for companies like Bajaj consumer, Dabur and Emami.

What experts say about FMCG firms

Abhishek Jain, Head of Research, Arihant Capital highlighted there is a 50 percent probability of having an El Niño this year and there are speculations that India will suffer from a draught or deficient monsoon and a severe heatwave due to this.

He said concerns over El Nino are already present in the market, as there has been relative underperformance of agrichem and rural-based stocks. FMCG stocks like HUL have already corrected 10 percent from their highs.

"We may see some impact on rural recovery but, after covid, the rate of savings among the rural population has increased decently vis-à-vis the urban population which can have some positive impact. Companies in the agrichem, irrigation and pipe segments may see higher demands because of the effects of El Niño," said Jain.

Manish Chowdhury, Head of Research at Stoxbox pointed out that the expected return of the El Nino climate phenomenon later this year is definitely not good news for the agriculture sector in India which is dependent on the four-month-long southwest monsoon.

"The direct threat of this phenomenon will be the rural economy which is heavily dependent on rains for their agricultural income source. With the latest commentaries from many FMCG players still suggesting a muted recovery in rural demand, it would be a double-whammy of high rural inflation and El Nino which would further take a toll on the recovery prospects," said Chowdhury.

"We believe that though FMCG companies are trying to boost mass discretionary spend by passing on the recent benefits of receding cost side pressures (increasing pack size at similar prices, launching smaller packets, etc), it would become increasingly difficult for these companies to navigate the tough environment by just relying on premiumization and focus on urban markets," said Chowdhury.

Avinash Pathak, a research analyst at LKP Securities observed during the concluded quarterly results commentary from some of the top FMCG majors have been that they are witnessing some green shoots in rural markets as inflation has cooled off a bit.

However, adverse weather conditions could be a roadblock to this recovery, said Pathak.

"Rainfall deficit is a major cause of the rural slowdown because it affects crop sowing and farm income. Hence, El Niño conditions, if they happen, remain a key monitorable ahead," said Pathak.

Vincent K Andrews, a research analyst at Geojit Financial Services underscored the importance of a good monsoon for the Indian economy, as almost half of the country’s farmers depend on rain-fed irrigation.

"The rural market contributes significantly to FMCG companies' revenue, and any impact in rural areas can directly affect FMCG demand and costs, which is already suffering from a slowdown in demand because of the intense inflationary pressure. We need to observe the actual rainfall distribution and sowing trend, so it is too early to be concerned about the impact," said Andrews.

Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.