FMCG companies' revenue growth may moderate, but there is a silver lining

stocks

Indian Market
by 5paisa Research Team Last Updated: 2022-12-13T11:14:43+05:30

Revenue growth of the fast-moving consumer goods (FMCG) sector is expected to be nearly stable in the current year and the next after rising around 8.5% last fiscal year, but companies can take heart from the fact that demand is expected to pick up from the coming year.

Revenue growth is pegged at 7-9% this fiscal, primarily driven by price hikes, given surging input costs. But volume growth will be just 1-2% compared with 2.5% last fiscal.

While the revenue growth is likely to remain in the similar range in the year ending March 2024 too, volume growth is expected to be the driver as rural demand is expected to improve with inflation gradually beginning to moderate, even as urban demand will continue to remain steady, according to rating and research agency CRISIL.

Meanwhile, operating margin will see a 100-150 basis points moderation to 18-19% this fiscal on higher input costs (primarily wheat, milk, maize, rice, crude derivatives) and rise in selling and marketing expenses, despite price hikes undertaken by FMCG players over the last 4-5 quarters.

However, softening in price of some raw materials, such as edible oil and sugar, will support profitability levels in the second half of the current fiscal, as per a CRISIL Ratings study of 76 FMCG companies accounting for over a third of the Rs 4.7 trillion annual revenue of the sector.

It expects that in the coming fiscal operating margins should improve by 50-70 bps, considering better volume driven growth and coverage of costs, almost reaching pre-pandemic levels of around 20%.

Next fiscal, higher minimum support prices for key crops and a good harvest should aid rural growth and help gradual recovery in rural demand. Besides, increased spends on rural infrastructure by the government, resulting in improved rural income levels, would also support growth. On the other hand, urban demand will remain steady next fiscal, supporting volume growth.

Also, revenue growth will vary across segments as well, as consumer prioritize spends.

The food and beverages segment, which constitutes around half of the sector’s revenue, may grow 8-10% this fiscal, given their essential nature, and lower penetration in organized retail, compared to other segments. On the other hand, consumption of personal care and home care segments, which account for the balance half of the sector’s revenues, will grow 6-8%, with consumer being discrete and also resorting to downtrading, owing to higher prices, according to CRISIL.

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