FMCG sector revenue to grow 10-12pc this fiscal: CRISIL Ratings

The FMCG sector's revenue is set to grow 10-12 percent this fiscal year, driven by price hikes affected across product categories to offset the impact of the raw material price increase and a raft of other favourable factors, CRISIL Ratings reported. 

Revenue will double from the last year, where operating margin will be restored to the normal level of 19-20 percent with a moderation of 80-100 basis points (bps) this fiscal due to an increase in advertising expense and a rise in raw material prices. 

Interestingly, the operating margin had improved by about 100 bps last fiscal despite lower revenue growth, due to the reduction in advertising and promotional expenses.

An analysis of 57 CRISIL-rated FMCG companies — which represent close to one-third of the sector revenue of Rs 4.2 lakh crore last fiscal — indicates the continuation of strong cash generation and healthy balance sheets and sizable cash surpluses will ensure credit outlook remains ‘stable’.

Anuj Sethi, Senior Director of CRISIL Ratings, said, 

“Price hikes of 4-5 percent affected by the players across product categories over the past six months to pass on inflation in raw materials, together with volume growth of 5-6 percent, and a revival in demand for discretionary products will support revenue growth of 10-12 percent this fiscal."

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"Widespread COVID-19 afflictions in the hinterland during the second wave will result in the moderation in rural growth this fiscal. However, recovery in urban demand for FMCG products will offset this and outpace rural revenue growth," he added. 

Urban versus rural demand

According to the report, the urban segment — which accounts for over half of the sector revenue — will see an improvement, riding on growth in discretionary categories on a low base of last fiscal and phased resumption of offices and educational institutions.

Last fiscal, urban revenue growth was impacted disproportionately due to limited mobility and supply chain disruptions caused by the pandemic, especially in the April-June quarter and lower discretionary spending by consumers.

A reduction in COVID-19 infections across the country and increasing pace of vaccinations will drive recovery in discretionary and out-of-home consumption categories in the near term, the report highlighted.

In the rural segment, however, lower allocation to MNREGA in the union budget, slower sowing in the current crop season, and widespread impact of the second COVID-19 wave will moderate rural growth for FMCG products, it said.

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"Rural demand had saved the day for the sector last fiscal, supported by two consecutive years of good monsoon, better farm output, and a higher proportion of essential products consumed. That said, healthy reservoir levels, higher minimum support prices, and the expected increase in non-agriculture rural employment will provide some respite to rural demand this fiscal," the report said.

The overall recovery in demand for the sector was already visible in the second half of last fiscal, with 15 large listed FMCG companies posting revenue growth of 10 percent in the second half (on-year) as against a revenue de-growth of 1 percent in the first half.

Rate of revenue growth

 The CRISIL Rating report also said growth in the food and beverages, accounting for about 50 percent of revenue, and home care segments — which saw limited moderation in growth last fiscal given the essential nature of these products and enhanced hygiene awareness — will grow 8-10 percent this fiscal. 

The personal care segment, which has sub-segments such as skin care, hair oils, and hair colours, is expected to grow faster at 11-13 percent, driven by price increases and a low base of last fiscal.

Gautam Shahi, Director of CRISIL Ratings, said, 

 “Traditionally, credit profiles of FMCG players have shown high stability due to healthy cash-generating ability, moderate capital spending needs, well-capitalised balance sheets, and sizable liquid surplus (over Rs 20,000 crore in fiscal 2021). This year will not be very different, given the recovery in demand and continuing strong balance sheets for CRISIL rated FMCG companies.”