FMCG stocks could feel the rural pinch in fiscal year FY23

A combination of weak Kharif output, erratic monsoons and high inflation is likely to create a new kind of problem for the manufacturers of fast moving consumer goods (FMCG). While that was prominent in the September 2022 quarter, this effect is likely to spread to the next few quarters also. Most FMCG companies have been able to compensate part of the spike in cost of input through price hikes. While this has helped to grow the top line, the profits continue to be under pressure. It is in this context that the rural pinch could put the FMCG companies in India in a rather awkward situation.

According to a recent research report, FMCG companies rely heavily on the rural markets to sustain growth. Companies like Hindustan Unilever get more than half of their revenues from the mid-sized towns and rural areas, even as the metros remain their most high profile market and customer touchpoint. It is expected that in the next few quarters, the sluggish rural trend would be clearly palpable on volume growth, albeit product price hikes will drive double-digit revenue growth for the FMCG companies. However, due to cost pressures, the gross margins and EBITDA margin will remain at a multi-quarter low.

While weak Kharif and erratic monsoons have hit rural incomes in the year, high inflation has also been a reason. For example, companies manufacturing detergent, food, personal care products as well as manufacturers of biscuits have been raising prices to counter a spike in input costs. That has impacted demand, especially rural demand amidst tough times. However, there have also been cuts coming along the way. For instance, edible oil companies cut prices by Rs10-15 a litre in August with overall cuts of up to Rs25 in the last quarter. Hindustan Unilever and GCPL are cutting soap prices with falling palm oil prices.

In the June quarter, consumer goods companies reported 10.9% increase in sales, despite a -0.7% fall in the volumes. However, data put out by Nielsen does reveal some volume pick up in the September quarter compared to the June quarter. However, the underlying story was that urban markets witnessed revival in volume growth but the rural markets saw slower recovery. Normally, the last quarter to December is considered to be a robust quarter due to a spate of festivals in this period, when spending is the highest. It remains to be seen if rural Indian demand can rise to the occasion. That would really be the litmus test for the FMCG companies. After all, rural demand impacts their volumes in a significant way.