Revenue of the fast-moving consumer goods (FMCG) sector will grow 7-9% this fiscal compared with ~8.5% in the last, primarily driven by price hikes, given surging input costs. Volume growth will, however, be just 1-2% compared with 2.5% last fiscal. Next fiscal, too, the sector should see almost similar pace of growth, but driven by volumes. That’s because rural demand is expected to improve with inflation gradually beginning to moderate, even as urban demand will continue to remain steady.

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.

Next fiscal, operating margins should improve by 50-70 bps, considering better volume driven growth and coverage of costs, almost reaching pre-pandemic levels of ~20%.

A CRISIL Ratings study of 76 FMCG companies accounting for ~35% of the Rs 4.7 lakh crore annual revenue of the sector, indicates as much.

Says Anuj Sethi, Senior Director, CRISIL Ratings, “Similar to fiscal 2021, volume growth for the sector will remain subdued owing to sluggish rural demand (~40% of overall FMCG demand) with inflation led price hikes of 7-8% 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 (D2C) and sales through e-commerce channels. That said, in both urban and rural areas, consumer preference is shifting to smaller pack sizes, which too is weighing on volume growth.”

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.

Says Aditya Jhaver, Director, CRISIL Ratings, “The food and beverages segment, which constitutes around half of the sector’s revenue, will 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.”

Credit profiles of FMCG players are seen stable supported by healthy cash accruals, strong balance sheets with continuing low dependency on debt, and sizeable liquid surpluses.

Any sharp movements in agri-based raw material prices, crude linked raw materials and the extent of recovery in rural demand will bear watching.