FMCG firms staring at muted revenue growth amid inflation?

According to a report, slow rural demand and higher inflation will mute revenue growth in the fast-moving consumer products (FMCG), at 7-9% this fiscal and next, as compared to 8.5% in the previous fiscal.

Nearly 40% of the Rs.4.7 lakh-crore sector’s revenue comes from the hinterlands markets. These markets have been hard hit by high inflation and low wages, as well as high job losses, since the Covid pandemic.

Crisil reported Monday that revenue growth in the FMCG sector will slow to 7-9% this fiscal and next, compared with 8.5% in the previous. Volume growth will only be around 1-2%, compared to 2.5 percent in the last fiscal.

According to the report, the slow revenue growth is due to the price increases that FMCG companies made during the year to offset the effects of rising input costs.

The sector will see similar growth in the next fiscal, as inflation will likely remain high, but it will improve if the prices decrease, the report said.

The agency’s optimism stems from its assessment that rural demand is improving, with inflation slowly moderating, and urban demand continuing to be steady.

Further, the report stated that operating margins would moderate 100-150 basis point to 18-19% this fiscal due to higher input costs (primarily wheat and milk, maize, crude derivatives, and rice) as well as higher marketing expenses. These have helped reduce price increases over the past four-five years.

The report notes that profitability levels will be supported in the second half by softening raw materials like sugar and edible oils.

Based on analysis of 76 FMCG , which account for 35% of the Rs.4.7-lakh crore industry, the report expects operating margins of 50-70bps (basis points), next fiscal. This is due to better volume driven growth, coverage of costs, and almost reaching pre-pandemic levels around 20%.

Anuj Sethi is a senior director at the agency. He says that volume growth will be subdued like in fiscal 2021 due to slow rural demand (40% of total FMCG demand), and inflation-led price increases of 7-8% over the past twelve months. Urban demand, on the other hand is less affected by inflationary pressures, and will grow more quickly, thanks to increased direct-to consumer and e-commerce sales.

The increasing preference for smaller packs, both in urban and rural areas, is another reason for the slow revenue growth.

According to the report, minimum support prices for key crops will rise. A good harvest should help rural growth and aid the gradual recovery of rural demand in fiscal 2019. Volume growth should be supported by increased spending on rural infrastructure. Urban demand will be steady next fiscal and support volume growth.

Aditya Jhaver is a director at the agency. She stated that the sectoral revenue for food and beverages, which accounts for around half, will increase 8-10% this fiscal due to their essential nature and lower penetration of organised retail than other segments. However, the sectoral revenue will see a 6-8 percent increase in personal and home care consumption. This is due to consumers resorting to downtrading because of higher prices.

The credit profiles of the companies that were analysed are stable, with healthy cash accruals and strong balance sheets, low debt dependency, and large liquid surpluses. The report stated that any sharp changes in agri-based raw materials prices or crude-linked raw material prices and the extent to which rural demand recovery is occurring will be worth watching.

(Only the headline, picture and text of this report could have been modified by Business Standard staff. The rest of the content is generated from a syndicated feed.

Shivi

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