Revenue growth of the fast-moving consumer goods (FMCG) sector will double from 5-6% last fiscal to 10-12% in the current one – the highest in the past three fiscals – driven by price hikes effected across product categories to offset the impact of raw material price increase and a raft of other favourable factors.

Operating margin, on the other hand, will be restored to the normal level of 19-20% with a moderation of 80-100 basis points (bps) this fiscal due to increase in advertising expense and rise in raw material prices. Interestingly, operating margin had improved by ~100 bps last fiscal despite lower revenue growth, due to reduction in advertising and promotional expenses.

A continuation of strong cash generation and healthy balance sheets, as well as sizeable cash surpluses, will ensure credit outlook remains ‘stable’. 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 as much.

Says Anuj Sethi, Senior Director, CRISIL Ratings, “Price hikes of 4-5% effected 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% and a revival in demand for discretionary products, will support revenue growth of 10-12% this fiscal. Widespread Covid-19 afflictions in the hinterland during the second wave will result in moderation in rural growth this fiscal. However, recovery in urban demand for FMCG products will offset this and outpace rural revenue growth.”

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, as well as 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.

In the rural segment, however, lower allocation to MNREGA in the union budget, slower sowing in current crop season, and widespread impact of the second wave of the pandemic will moderate rural growth for FMCG products (as shown in Annexure 1). 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 expected increase in non-agriculture rural employment will provide some respite to rural demand this fiscal.

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

The rate of revenue growth, though, is unlikely to be uniform across product segments (refer Annexure 2) and firms. Growth in the food and beverages (accounting for ~50% 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% this fiscal. The personal care segment, which has the highest proportion of discretionary products in sub-segments such as skin care, hair oils, and hair colours, is expected to grow faster at 11-13%, driven by price increases and a low base of last fiscal.

Says Gautam Shahi, Director, CRISIL Ratings, “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 sizeable liquid surplus (over Rs 20,000 crore in fiscal 2021). This year will not be very different, given recovery in demand and continuing strong balance sheets for CRISIL rated FMCG companies. The gearing* ratio will remain below 0.3 time this fiscal.”

Pace of consumption in rural markets, which depends on monsoon and farm incomes, and rebound of discretionary demand will remain the key monitorables.

*Gearing ratio – adjusted debt/ adjusted networth