By HARSH JOSHI
It isn't just farmers who pray for rain in India. Consumer-products investors also watch the clouds for signs of how their companies will perform.
The yearly monsoon season is usually a key driver of sales growth for the makers of processed food, soap and deodorant. India lacks irrigation systems, so more than half of the population directly benefits as rains give a boost to agriculture, and hence their income.
But the situation this year looks different. While it is predicted that annual rainfall will be good, India is plagued by prolonged inflation. That is eating into people's wallets, forcing them to cut discretionary spending as they struggle to buy basic food items.
Meanwhile, any fall in food prices due to strong rainfall could be short lived. Feeble storage and distribution infrastructure nullifies much of the benefit of higher production. This was evident last year, when despite a bumper harvest, food prices stayed stubbornly high.
So the pressure on families' wallets from high food prices may not abate. And for companies, the cost of raw materials, both food and other global commodities, may remain high, threatening margins.
At Godrej Consumer Products, where bath soaps account for 30% of revenue, Chief Financial Officer P. Ganesh says lower palm-oil prices are critical for improving profitability.
What complicates matters further is that companies are chasing sales-volume growth due to intense competition across product categories. This, coupled with stretched consumers, makes it tougher to pass on high input costs.
Even so, investors have started placing the annual bet on consumer-goods companies. The Bombay Stock Exchange's FMCG index is up 3.3% in the last seven weeks, compared with a decline of 4.6% in broader markets.
It is telling, though, that during inflationary cycles in the past decade, the consumer-goods industry has produced the second-lowest returns, behind only telecommunications, according to Morgan Stanley.
This year it could yet rain hard on the parade.
Write to Harsh Joshi at email@example.com