Silver lining for FMCG companies as sector posts robust 37% growth in Q1

Hopes of demand recovery and plateauing of input costs coupled with stock underperformance are triggers

Private consumption demand is a big component of India’s GDP contributing over 50 per cent. The GDP contraction in 2020-21 was largely due to the collapse of consumption. While big ticket items like personal vehicles, real estate and to a lesser extent, white goods, are consumption drivers, FMCG is the most stable consumption component.

In Q1, 2021-22 (April-June 2021) according to Nielsen, FMCGs saw collective year-on-year growth of 37 per cent in value-terms over the low base of the Q1, 2020-21, when roughly two months were wiped out by lockdowns. The second wave did not lead to as much disruption as the first wave. However, the same sample saw a sequential contraction of 2 per cent over the relatively normal Q4, 2020-21.

Going forward, FMCGs do face challenges. One is a big spike in inflation, which has led to rising input costs. Another is supply chain disruptions in certain areas. A third issue is low consumer confidence in the face of job losses.

However, according to Nielsen, the Indian FMCG industry grew 9.4 per cent YoY in Q4, 2020-21 (which is calculated on a pre-pandemic base of Jan-Mar 2020). A report from Crisil estimates that FMCG companies will grow revenues by 10-12 per cent overall in the current fiscal. This should lead to renewed investor interest, given that FMCG has underperformed the broader indices through the last year.

There are several elements to back up optimism. One is that the rural and semi-urban market (which roughly contributes 36 per cent market share) registered double-digit growth through the first six months of calendar 2021. Urban and metro markets also registered positive growth in the second half of 2020-21, and that growth should strengthen in ongoing Q2.

Crisil estimates price hikes of 4-5 per cent across product categories over the past six months have helped to pass on inflation in input costs. Together with volume growth of 5-6 per cent and some demand revival, this will support revenue growth of 10-12 per cent in this fiscal. Low interest rates may also have helped improve profitability though most FMCG majors have relatively little debt. Moreover, there is a case for hoping input costs will plateau near the current levels.

The pandemic has led to faster growth via the e-commerce channels, while companies have also managed to cut advertising and marketing spends and pushed out products through the chemists’ network having learned from the experience of 2020 lockdowns. There has also been a behavioural change leading to a boost in demand for personal hygiene products.

There should be opportunities within the FMCG space, especially in companies focused on health hygiene. The share price performance should catch up with the rest of the market, given that profitability grew through the last three quarters. If margin pressures do ease off with input costs plateauing, there’s a chance of stronger earnings growth.

The 15-stock Nifty FMCG index has returned 19 per cent in the last year and 4 per cent in the last month. In itself, this is not bad but it’s far lower than the Nifty, which returned 45 per cent in the last 12 months and 5 per cent in the last month. If there’s sector-rotation, FMCG will be a target for investment.