Dear Investors,
The following chart depicts our returns viz BSE 500 TRI.
In this memo we will be discussing the two polar opposite sides of India’s economic growth. We in the capital markets often see a limited (read positive) side of the Indian economy. Listed markets represent only a fraction (NSE 500 PAT is <5% of the GDP) of the economy. Lastly, the stakes in the capital markets are sometimes aligned to only share the good news. The cumulative news on the ground however, is that only one part of the economy (read urban) is firing and the balance rural is still reeling under the stress of COVID induced shocks/inflation and a poor monsoon.
In this memo we will share some data points to highlight the same:
The broader growth of Agri and allied activities has been lagging:
Source:RBI
If you look at the chart above, it is apparent that a large part of our economic growth has been driven by services which primarily employ urban India. Agri & Mining have had kind of a muted rebound post COVID. These sectors employ the masses in rural and non Tier 1/2 cities.
Rural Daily Wages have been declining in purchasing power for the last 5 years:
Source: Indian Labour Bureau
As we see from the data above, the rural daily wages for agri/non agri activities have been roughly constant for the last 5 years. For the same period of 5 years, average annual consumer inflation has been ~7%. This data is fairly alarming, as it implies that the earning capacity of rural India is down by ~35% over the last 5 years. The same is corroborated by the next section too.
Wages at the lower end of the income pyramid have been reducing:
The table above highlights a stark K shaped recovery that the Indian economy has had since COVID. The Income of the richest 20% has at best caught up with inflation, whereas for the rest, the average household income has de-grown by 30-50%. The contrast of income growth is even more stark if we compare the top 1% of the population. This has had a direct impact on the consumption patterns which we will highlight in the following sections.
Passenger vehicle growth outstrips the 2 Vehicle Growth:
Source: SIAM
Passenger vehicles which are primarily sold in Urban India have shown a strong rebound post COVID, whereas 2 Wheelers which are predominantly sold in smaller towns (~ 50-60% of sales is rural) haven’t come even closer to their 2018 levels
Within, passenger vehicles, SUVs, which have a > INR 10 L price point, have shown a phenomenal growth when compared to the Hatchback vehicles in the lower/entry price point, refer below:
If we look at the last 12 months, urban consumption has outpaced rural consumption. CEOs of leading companies such as HUL, Dabur, Marico have highlighted the same in their management commentaries over the last 12 months. A recent study by AC Nielsen, attributed rural demand in Q2 FY 24 to be 300 bps lower than that for urban demand. Even Q1 or Q2 volume growth of rural focused FMCG businesses have been sluggish. Companies such as those mentioned above, have demonstrated a yoy 3-5% revenue growth and a negative volume growth.
When we widen the canvas to paints, shoes, innerware the commentary has been similar.
Few reasons for the sluggish demand of FMCG and consumer goods are: 1. Higher inflation of goods in rural India when compared to urban India, 2. Lower/erratic rainfall. Unseasonal rainfall in the first quarter of 2023-24 resulted in significant crop damage and lower output. In the second quarter, the erratic monsoon has hurt crop sowing. Refer charts below:
Impact on Capital Markets:
Leading consumer goods companies like HUL, Marico, Dabur, Asian Paints, Relaxo, have therefore underperformed the larger market. Some of our portfolio consumer companies have also faced slowness in demand: Amrutanjan, a dominant player in pain balm, has seen muted demand for the last 6 months. Our near term focus remains on investing in consumer brands that have a predominant urban footprint (Such as: Jyothy Labs). We are also closely tracking signs of recovery in rural demand so that we can invest ahead of time (read at a good valuation) in some leading brands.
Regards,
Prescient Capital