FMCG firms staring at muted revenue growth amid inflation?

A report stated that sluggish rural demand combined with higher inflation are likely to muffle revenue growth for the fast-moving consumer good sector (FMCG) at 7-9% this fiscal compared to 8.5 percent in the previous fiscal.

About 40% of the Rs.4.7-lakh crore sector comes from the hinterlands, which have been affected by high inflation, low wages, and high job loss since the Covid pandemic.

Crisil stated in a Monday report that the FMCG industry’s revenue growth will be muted at 7-9% in this fiscal and the next, as compared to 8.5% in last year. However, volume growth will be only about 1-2%, down from 2.5% last fiscal.

The report attributes the weak revenue growth to the price hikes that FMCG businesses took during the year in order to mitigate the effect of increasing input costs.

The sector should also see a similar rate of growth next fiscal. Inflation is expected to remain high, but will decrease if prices rise, the report stated.

Its optimism is based upon its assessment of rural demand increasing with inflation slowly lowering and urban demand remaining steady.

According to the report, operating margins will be reduced by 100-150 basis points to 18-19% in fiscal 2019. This is due to higher inputs (mainly wheat, milk and maize, as well crude derivatives), and higher marketing costs, which have slowed price rises over the past four-five months.

According to the report, profitability levels will rise in the second-half of the current fiscal if raw materials like edible oils and sugar are softened, however.

The report is based on an analysis by 76 FMCG that accounts for 35 percent of the Rs.4.7 lakh crore sector. It expects operating margins to improve by 50-70bps (basis point) next fiscal. This is a result of better volume driven growth and cost coverage, nearly reaching pre-pandemic levels at around 20%.

Anuj, a senior executive director of the agency, stated that like in fiscal 2020, volume growth will not be as strong due to slowing rural demand (40 percent of overall FMCG consumption) and inflation-driven price hikes of 7-8% over 12 months. However, the inflationary pressures are less severe for urban demand and it will grow faster due to higher direct-to-consumer sales and ecommerce.

Another reason for slowing revenue growth is that people are increasingly choosing smaller packs in both urban and rural areas.

The report anticipates that key crops will have higher minimum support prices. Good harvests should encourage rural growth, and assist in the recovery of rural demand. Volume growth will also be supported by an increase in rural infrastructure spending. However, volume growth will be supported by steady urban demand in the next fiscal.

Aditya Jahir, an agency director, stated that the food and beverage segment, which makes up around half the sectoral revenues, will grow 8-10% in the current fiscal. This is due to its essential nature and lower penetration at organised retail than other segments. The sectoral revenue from personal and homecare will increase by 6-8 percentage points, due to the fact that consumers are turning to downtrading as a result of higher prices.

The credit profiles of the companies were stable due to healthy cash accruals, strong balances with low dependence on debt and large liquid surpluses. The report warned that there will be sharp fluctuations in the prices of agri-based and crude-linked materials as well as the extent of recovery in rural consumption.

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