Sluggish rural demand along with higher inflation is set to mute revenue growth of the fast-moving consumer goods (FMCG) sector at 7-9 per cent this fiscal and the next compared to 8.5 per cent in the previous fiscal, a report said.
Almost 40 per cent of the Rs 4.7-lakh-crore sector come from the hinterland markets, which have been hit by high inflation, low wages and high job losses since the Covid pandemic.
Revenue growth of the FMCG sector will be muted at 7-9 per cent this fiscal and the next compared to 8.5 per cent in the last, while volume growth will be just about 1-2 per cent, down from 2.5 per cent last fiscal, Crisil said in a report on Monday.
The report attributes the tepid revenue growth to the many price hikes the FMCG companies effected during the year to cushion the impact of surging input costs.
Next fiscal too, the sector should see almost similar pace of growth as inflation is likely to remain high but will improve if prices moderate, the report added.
The agency's optimism is based on its assessment of rural demand improving with inflation gradually moderating and urban demand continuing to remain steady.
The report further said that operating margins will moderate 100-150 basis points to 18-19 per cent this fiscal on higher input costs (primarily wheat, milk, maize, rice, crude derivatives) and higher marketing expenses, which have whittled down the price hikes over the past four-five quarters.
However, softening raw materials such as edible oils and sugar will support profitability levels in the second half of the current fiscal, notes the report.
However, the report, based on an analysis of 76 FMCG companies that account for 35 per cent of the Rs 4.7-lakh crore sector expects operating margins to improve by 50-70 bps (basis points) next fiscal, considering better volume driven growth and coverage of costs, almost reaching pre-pandemic levels of around 20 per cent.
According to Anuj Sethi, a senior director with the agency, like in fiscal 2021, volume growth will remain subdued owing to sluggish rural demand (40 per cent of overall FMCG demand) with inflation led price hikes of 7-8 per cent over the past 12 months.
On the other hand, urban demand is less impacted by the inflationary pressures and will grow faster, led by increased direct-to-consumer and sales through e-commerce channels.
Another reason for the tepid revenue growth is the increasing preference for smaller packs in both urban as well as rural areas.
The report expects higher minimum support prices for key crops and a good harvest should aid rural growth and help gradual recovery in rural demand next fiscal. Increased spending on rural infrastructure should also support volume growth.
On the other hand, urban demand will remain steady next fiscal, supporting volume growth.
Aditya Jhaver, a director with the agency, said, the food and beverages segment, which constitutes around half of the sectoral revenue, will grow 8-10 per cent this fiscal, given their essential nature and lower penetration in organised retail, compared to other segments.
On the other hand, consumption of personal and home care segments, which account for the other half of the sectoral revenue, will grow 6-8 per cent, as consumers are resorting to downtrading, owing to higher prices.
Credit profiles of the analysed companies are stable supported by healthy cash accruals, strong balance sheets with continuing low dependency on debt, and sizeable liquid surpluses.
However, any sharp movements in agri-based raw material prices, crude-linked raw materials and the extent of recovery in rural demand will bear watching, the report said.
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