Relatively good monsoon last year coupled with rising infrastructure spending led to a rise in rural spending. Rural consumption grew at a scorching pace of 9.7% in the year ended 31st March as against 8.6% growth in urban spending.
Why is this important
The faster pace of rural growth is good for FMCG companies whose sales were affected in 2014 and 2015 due to drought conditions. Further, when the demand was about to normalize the twin effect of demonetization and GST added fuel to the fire.
How the stocks will be impacted
The rising rural consumption will lead to growth in sales of FMCG companies as rural sales contributes 40-45% of their total sales as per Crisil Ltd. The rural revenue of FMCG companies is expected to grow by 15-16% in FY19 as against 10% growth estimated for FY18 and 5% growth seen in FY17 and FY16.
ITC (CMP: Rs 282, M.cap: Rs 3,44,283 crore, 25x FY20E PE) and HUL (CMP: Rs 1578, M.cap: Rs 3,41,757 crore, 46x FY20E PE) are big beneficiaries of this rural consumption growth.