According to Crisil Ratings, revenue growth in the fast-moving consumer goods (FMCG) industry will treble from 5 to 6% last fiscal to 10 to 12% this fiscal.
This revenue growth will be the biggest in the last three fiscal years, thanks to the price increases across the board to offset the impact of rising raw material prices and a slew of other favorable variables.
On the other hand, operating margins will be restored to a typical range of 19-20% this fiscal year, with a moderation of 80 to 100 basis points (bps) due to higher advertising costs and higher raw material costs.
As the pace of economic recovery quickens toward the latter half of FY22, consumer-facing companies that have reported earnings thus far in the June quarter foresee a ‘very optimistic demand’ situation, consistent with a double-digit growth expectation for the year.
In its post-earnings statement, Jubilant Foodworks (JFL), which operates the fast service restaurant brands Domino’s Pizza and Dunkin’ Donuts, said it anticipated hyper-growth for its brands, headed by Domino’s.
According to Crisil, despite reduced revenue growth, operating margin improved by 100 basis points last fiscal year due to fewer advertising and promotional expenses.
The credit outlook will stay stable if high cash generation, healthy balance sheets, and sizable cash surpluses continue. According to a study of 57 Crisil-rated FMCG companies, which accounted for over a third of the sector’s Rs 4.2 lakh crore in revenue last fiscal, this is the case.
According to Anuj Sethi, Senior Director of Crisil Ratings, price hikes of 4-5% affected by players across product categories in the last six months to pass on inflation in raw materials, combined with volume growth of 5-6% and a revival in demand for discretionary products, will support revenue growth of 10-12% this fiscal year.
“Widespread Covid-19 afflictions in the hinterland during the second wave will result in a moderation in rural growth this fiscal. However, recovery in urban demand for FMCG products will offset this and outpace rural revenue growth,” he said.
On the back of growth in discretionary categories, the urban segment, which accounts for more than half of the sector’s revenue, will experience an increase from last fiscal’s low base.
Last fiscal year, urban revenue growth was disproportionately impacted by the pandemic’s limited mobility and supply chain interruptions, particularly in the April to June quarter and lower consumer discretionary spending.
In the short term, a decrease in Covid-19 infections across the country and an increase in vaccination rates will drive recovery in the discretionary and out-of-home consumption categories.
However, a reduction in MNREGA funding in the Union Budget, slower sowing in the current crop season, and the widespread impact of the pandemic’s second wave could limit rural demand for FMCG products.
Last fiscal year, the sector was saved by rural demand, which was boosted by two years of strong monsoons, improved farm output, and a higher proportion of vital products consumed.
This fiscal year, healthy reservoir levels, higher minimum support prices, and an increase in non-agriculture rural employment are predicted to bring some relief to rural demand.
