A slow rural revival and a weaker-than-expected festive period may hurt sales of fast-moving consumer goods (FMCG) companies in the December quarter (Q3). Rural volume growth is likely to trail urban volume growth in the quarter under review, said analysts, adding that the with overall FMCG value growth likely to be limited, as pricing power remains muted in a weak market.
“Although moderating commodity inflation in diesel and fertiliser costs augurs well for the rural segment, we forecast that volume growth for most players would remain challenging in Q3 of FY24,” Abneesh Roy, executive director at Nuvama Institutional Equities, said.
The country’s largest consumer goods company, Hindustan Unilever (HUL), has alluded to the same, saying that it is losing share at the mass-end of the market, notably, in categories that depend on commodity prices such as tea and laundry.
While the domestic FMCG market had reported a 9% year-on-year jump in September 2023 quarter sales and an 8.6% rise in volumes for the period, according to NielsenIQ, the picture could be different in the December quarter, executives at top FMCG companies say.
Overall volume growth could come in at 6-7% for Q3, led by urban markets, while price-led growth could remain flat as companies have had to pass on price gains to consumers as they compete with small players. Rural volume growth, on the other hand, could come in at 3-4% versus 8-9% for urban markets, FMCG industry officials said.
“Urban markets have been largely resilient versus rural markets whose growth has been slower than expected. There have been liquidity pressures in rural markets, which reflected in poor offtakes during the festive season. This will weigh on the market in Q3, though we remain hopeful of a stronger recovery in the quarters ahead,” Mohit Malhotra, chief executive officer, Dabur India, said.
Traditional trade, which constitutes 80% of an FMCG company’s business, is likely to see a tepid 3-4% growth only in Q3, according to industry executives, as demand in rural and semi-urban areas remain weak. Modern trade, on the other hand, could see robust growth of around 20-21% in Q3 as urban demand remains stable.
Brokerage Nomura in its report on the FMCG market on Wednesday said that it expected gross margin expansion to be strong in Q3 as raw material inflation had cooled off. At the same time, operating margin expansion would be muted as most large players had been stepping up advertising and sales promotion expenditure in the face of competitive intensity.
While gross margins were likely to expand by 200-300 basis points in Q3, operating profit margin expansion could be capped at around 50-100 basis points as companies turn up the heat on advertising and marketing initiatives.
