The fast-moving consumer goods (FMCG) sector is expected to see revenue growth double from 5-6 per cent in the last fiscal to 10-12 per cent in the current fiscal (2021-22) mainly due to price rise across product categories. The growth in the current fiscal is the highest that the FMCG sector in India is expected to witness during the past three fiscals.
Interestingly, the price rise has also offset the impact of raw material price increase seen recently. As per a report by CRISIL, the operating margin of most of the FMCG companies had improved by 100 bps last fiscal despite lower revenue growth, due to reduction in advertising and promotional expenses.
“Price hikes of 4-5 per cent 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 per cent and a revival in demand for discretionary products, will support revenue growth of 10-12 per cent 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,” pointed out Anuj Sethi, Senior Director, CRISIL Ratings.
As per the CRISIL 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. During the 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 are expected to drive recovery in discretionary and out of home consumption categories in the near term.
However, the report observes that in the rural segment, 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 growth for FMCG products. The report further points out that rural demand had saved the day for the sector during the last fiscal and was supported by two consecutive years of good monsoon, better farm output, and a higher proportion of essential products consumed. It is being expected that healthy reservoir levels, higher minimum support prices and expected increase in non-agriculture rural employment will provide some respite to the rural demand this fiscal.
Experts at CRISIL point out that the overall recovery in demand for the sector was already visible in the second half of the last fiscal, post easing of lockdowns, with 15 large, listed FMCG companies posting revenue growth of 10 per cent in the second half (year-on-year) as against a revenue degrowth