InvestorQ : Is it true that the profit numbers of Adani Wilmar and Hero Moto have been hit by weak rural demand in the quarter?
Niti Shenoi made post

Is it true that the profit numbers of Adani Wilmar and Hero Moto have been hit by weak rural demand in the quarter?

ishika Banerjee answered.
3 weeks ago

My immediate response would be that in both the cases, the rural demand appears to be the real pressure point. Although they are in two different sectors, the numbers narrate almost the same story. Rural demand has been rapidly slowing and that is hitting the top line volumes and the bottom lines quite hard. That is not surprising considering the weak Kharif output this year and the inordinately high levels of rural inflation. Hero Motocorp and Adani Wilmar rely fairly heavily on robust rural demand to grow their sales and that has been the missing link. It is just that the problem aggravated in this quarter.

Let me first dwell on what has actually gone wrong with the rural economy that has hit these 2 companies.

a) The first challenge pertains to the erratic agriculture output in the latest year due to uncertain rains and the rising input costs. This has put farmer incomes under a lot of strain and remember that 2022 was the year for doubling farm incomes.

b) Rural inflation has been consistently higher than urban inflation, and that has more or less offset or more than offset the impact of improved MSP or minimum selling prices. The rural inflation is tighter on food and core inflation. That has hit rural demand hard.

c) Finally, one thing we cannot ignore is that the higher cost of funds is also pinching farmers and rural India, where the ability to endure higher cost of funds is quite limited. More so, this has hit sectors like demand for two wheelers in the quarter.

Just look at the numbers of Hero Motocorp. Net profits for Q2FY23 fell by 8.63% on a yoy basis to Rs682.28 crore, despite the top line sales rising by 6.4% to Rs9,252 crore in the second quarter. Incidentally, the sales growth came from price increases rather than a spike in volumes. At the other end, Adani Wilmar, which had recently got listed reported a 73% fall in second-quarter net profits at Rs48.76 crore. That is a very sharp fall compared to the net profit of Rs182 crore in the year ago period. Both Hero Moto and Adani Wilmar were hit by a combination of weak rural demand added to high input costs.

While Hero Moto may see less of an impact, the impact could be sharper for Adani Wilmar. They are up against a new FMCG trend in rural aeras. A number of stressed and cash-strapped rural households are consciously opting for cheaper unbranded alternatives commonly sold in local Kirana stores. It is not only about unbranded products but also smaller packaging denominations as long as cost is saved. Although companies like Adani Wilmar have lowered prices to attract the rural market, the typical rural aspirational demand is missing and that is the crux of the problem. No easy solutions for now.