The revenue growth of the Fast-Moving Consumer Goods or FMCG sector is predicted to double this fiscal year compared to 2020, owing to factors such as a recovery in urban demand and discretionary segments, as well as price rises implemented to counter the impact of rising raw material prices. Last fiscal year, strong rural demand aided this sector in weathering a slowdown in urban demand.
A report by CRISIL Ratings has revealed that the FMCG sector is likely to generate sales by 10 to 12 per cent this fiscal year. The report also noted that this would be the highest growth rate in the previous three fiscal years but expressed concern about a slowdown in rural growth due to the second wave's extensive impact of the coronavirus pandemic.
As reported by the BusinessLine, Anuj Sethi, who is the senior director at CRISIL Ratings said: "Price hikes of 4 to 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 to 6 per cent and a revival in demand for discretionary products, will support revenue growth of 10 to 12 per cent this fiscal."
He also noted that rural growth would be limited this fiscal year due to widespread Covid-19 infections in the hinterlands during the second wave. But he claimed that the recovery in urban demand for FMCG products would compensate for this and outperform revenue growth in rural areas. Sethi also believes that due to increased advertising expenses and rising raw material prices, FMCG companies' operating margins are likely to be restored to 19 to 20 per cent with a moderation of 80 to 100 basis points (bps) this year.
According to the report, urban revenue growth in the fiscal year 2022 is expected to be 11 to 13 per cent, compared to 8 to 10 per cent in rural areas. Due to the pandemic, urban revenue growth was substantially hampered last fiscal year, particularly in the April and June quarters, because of decreased mobility, lower discretionary spending by customers and supply chain distribution, the report further noted. According to the CRISIL analysis, urban revenue growth would improve this fiscal year, owing to an increase in demand in discretionary categories and out-of-home channels.
The report reads: "In the rural segment, however, lower allocation to MGNREGA [Mahatma Gandhi National Rural Employment Guarantee Act, 2005] 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. That said, healthy reservoir levels, higher minimum support prices and an expected increase in non-agriculture rural employment will provide some respite to rural demand this fiscal."
The CRISIL report predicted that revenue growth in the food and beverage and home-care industries would be 8 to 10 per cent this fiscal year, even though revenue growth will not be consistent across segments. Meanwhile, due to price hikes and a low base from the previous fiscal, the personal care area—including skincare and hair products—is predicted to rise at a quicker rate of 11 to 13 per cent.
However, as per the report, an analysis of 57 CRISIL-rated FMCG companies found that continued robust cash generation, sound balance sheets and sizable cash surpluses will keep the credit outlook balanced.
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