FMCG: After decade-low volume performance in Q4, worst yet to come

Q4 was weaker than demonetisation and GST periods, and June quarter is expected to see further pain despite hopes from better rural demand

Although the fast moving consumer goods (FMCG) sector is in a relatively better shape, it could not escape the pain arising from Covid-19-led disruptions. Average volumes have fallen to decade-low levels in March 2020 quarter (Q4'FY20), and the April-June (Q1'FY21) period is likely to be even worse.

In Q4'FY20, average volume of 8 FMCG companies declined by about 12 per cent amid supply chain disruptions. According to Vishal Gutka, vice president at PhillipCapital, “While volume de-growth in Q4 was mainly due to supply chain issues, which is kind of a one-time impact, the volume performance was the lowest in a decade.” Notably, the volume decline was higher than the fall seen during demonetisation (December 2016) quarter as well as the goods and services tax or GST implementation period (mid-2017).

Many analysts also believe that the volume performance in Q1 of FY21 would be FMCG sector's worst ever, even as most companies have ramped up their production. 

According to Shirish Pardeshi, analyst at Centrum Broking, “Given half of Q1'FY21 period was under complete lockdown, we expect volume off-take to be weaker than in March 2020 quarter, where lockdown was just for 10-12 days.” However, the packaged foods and other essential segments would see better off-take, he added. Beauty and personal care segments (other than hygiene) would continue to remain under pressure as seen in Q4'FY20.

Marico’s Q1'FY21 update, announced on last Friday, underlines this trend. The owner of popular Parachute hair oil expects Q1 volumes to decline in low-teen (11 to 14 per cent) compared to just 3 per cent fall in Q4'FY20. 

Among the exceptions is the food category. For instance, Marico's Saffola edible oil, which had seen 25 per cent volume growth in Q4, continued to see strong attraction in Q1 as well. Britannia and ITC’s FMCG segment, too, are outliers as they have seen over 20 per cent growth in April and May, as per HDFC Securities’ report. In Q4 also, with up to 10.8 per cent top-line growth, Britannia and Nestle, which are into packaged food, were the outlier. 

All other FMCG majors, including Hindustan Unilever (HUL) had seen net sales fall in Q4, which also percolated at bottom level.

Varun Singh, analyst at IDBI Capital confirms this trend. He says, “While discretionary segments like beauty and personal care would see further decline in volumes, there would be a moderate impact for hygiene, food items other than out of home consumption.” HUL’s management, during its Q4 earnings call, too, had highlighted that discretionary and out-of-home consumption categories will remain impacted in the near term. This is due to the shift in consumer preference away from discretionary spending or towards essentials.

While the situation is unprecedented, most companies, including from other sectors, expect rural to recover faster than urban India. Until the outbreak of Covid-19, rural demand (36 per cent of overall FMCG sales) was under pressure. However, lesser spread of Covid-19, government’s rural schemes like MGNREGA, reverse migration of daily-wage labourers, good rabi crop and normal monsoon bode well for rural India.

As per Nielsen, the consumption rate in rural India has reached 85 per cent of pre-Covid levels in May vis-à-vis 70 per cent in urban markets. Analysts say, the trend in June has improved further. Nielsen also estimates around 5 per cent growth in the overall FMCG segment over the next nine months with rural expanding 2 times the pace of urban growth, reversing the trend of the past two years. “Impact of cyclone and heavy rains in some parts, however, need to be seen,” Pardeshi cautions. 

The jury, though, is out on how the recovery pans out, both in urban and rural India.
 

Among the few silver linings are lower input costs and cost efficiency measures undertaken by companies. These are expected to partly soften the impact of subdued top-line in Q1.