As the monsoon’s progress gets delayed in select parts of the country and El Nino concerns continue, the industry is worried about how it could potentially impact consumer demand, especially in the rural areas. Though the FMCG sector seems poised for steady growth through H1FY24, the second quarter is likely to see some moderation in revenue growth .
According to the BNP Paribas report on the FMCG sector dynamics, the pricing benefits should fade and growth would have to be volume-led. Also, after four consecutive good monsoons, El Nino is a risk and may derail a rural recovery.
Kunal Vora, Head – India Equity Research of BNP Paribas believes that “Industry revenue growth has accelerated amid high inflation and we expect normalisation from H2FY24. Raw material trends provide comfort on margins, but with the price hike benefit tapering and likely to reverse, value growth could slide, so we find the street’s revenue estimate aggressive. This is without factoring in the El Nino risk and its potential impact on rural spending.”
Margin comfort improves
BNP Paribas further highlighted that margin comfort has improved with decline in raw material costs as prices of major commodities continued to soften during Q4FY23. This resulted in sequential improvements in gross margins for most companies. Given the moderation in inflation, companies have started to pass on the benefits to customers and this led to a volume uptick, boosting short-term demand . In addition, Vora points out that “high agri-commodity inflation can boost farmer income, leading to a rural demand recovery.”
Excerpts from management commentary in Q4FY23 earnings calls reflects this optimism on margins and volumes. According to Hindustan Unilever “As we had anticipated and called out earlier, the slowdown in the FMCG market is bottoming out. This improvement was led by volumes, which has turned flat this quarter, vs a mid-single digit decline in Q3FY23.”
Godrej Consumer management expects this momentum to continue and to deliver volume-led growth on the back of enhanced marketing and category development initiatives. Marico management said that “Looking at FMCG volume trends in this period, we believe the prospects of a sustained recovery have strengthened. After five quarters of volume decline, the sector has posted volume growth. Urban consumption has been steady, while rural consumption is showing some convincing signs of having bottomed out. Foods continues to drive growth for the sector, while HPC has also entered positive territory after an extended slowdown.”
Volume growth likely
Volume recovery is also expected, as per the BNP Paribas report, albeit on a lower base. Overall, volume growth in FMCG remained at mid-single digits YoY for most companies in Q4FY23 due to anniversarisation of price hikes and premiumisation, despite muted rural demand. However, organic volume growth “continued to remain negative given its high salience in discretionary and rural categories, which continues to impact its domestic business,” the report pointed out.