Stabilisation in retail inflation, coupled with volume growth in rural and urban India has given FMCG companies a boost in the June-ended quarter. With normal rainfall in the offing and a festive season ahead, the sector could look at steady growth going forward.
India’s retail inflation moderated to 6.8 per cent year-on-year (y-o-y) in August from a high of 7.4 per cent in July. The sharp surge in food inflation in July, owing to skyrocketing prices of vegetables, witnessed some moderation in August owing to the government’s active intervention. However, the contribution of food and beverages to the overall inflation reached a high of 62 per cent in August.
The positive consumption growth in the hinterland seen in the quarter is heartening, as more than 2/3rd of India’s population resides in rural areas of the country. Urban India continues to be the growth engine in terms of value growth, with organised retail seeing high double-digit growth in Modern Trade.
“For the first time in the last year, we also see a turnaround in traditional trade – primarily driven by grocers,” Roosevelt D’Souza, India Customer Success Leader, NIQ said in a statement.
The drop in the rate of inflation overall in the economy has also led to a decline in inflation for food categories and given an opportunity for consumers to be cautiously optimistic. This can be seen in the shifts in consumption patterns in the quarter gone by, and by consumers that are now willing to buy more.
“The upward trends seen in rural markets are particularly encouraging, and maybe the turning point for the industry”, Satish Pillai, Managing Director – India, NIQ said in a statement.
Food inflation eased from double-digit growth of 10.6 per cent y-o-y in July, to 9.2 per cent y-o-y in August. The moderation was on account of softening vegetable inflation, which on a sequential basis registered contraction. Inflation in key items such as tomatoes, potatoes and onions eased on a sequential basis in August, according to brokerage houses.
Industry watchers point out that food inflation continues to pose a threat to the headline inflation number. As of September 11, cumulative rainfall is at a deficit of 10 per cent. As a result, sowing patterns of kharif crops such as pulses, oilseeds and cotton remain lower than a year ago. More importantly, the threat of El Nino’s impact on inflation still lingers. Poor rainfall resulting in lower reservoir levels could in turn also hurt rabi output.
Pillai added that Grammage reduction and shift towards smaller packs has continued. As per the data, improvement in consumption growth is led by more number of units being consumed, however, shifts towards larger packs are awaited. Urban, rural and traditional trade see an upward movement in terms of average pack size growth but remain negative, while modern trade continues showing a further decline in average pack size growth, as per NIQ.
FMCG quarterly performance
FMCG biggies such as Godrej Consumer Products (GCPL), Marico, Dabur and Patanjali Foods have given out mixed signals with regard to their financial performance in the June quarter. Let’s start with the strong performers.
GCPL said that consumer demand was steady in the June quarter, as inflation moderated during the period. “In India, the overall consumer demand remained steady as seen in the previous few quarters. Sales growth was marginally higher than mid-single digit as we passed on the benefits of lower input costs to our consumers,” GCPL said.
At a consolidated level (organic), GCPL expects to deliver high-single-digit volume growth, and teen growth in constant currency terms translating into close to double-digit sales growth in rupee terms. Sales growth (including inorganic) is likely to be in double digits, the company said. “Our quality of profits has seen sustained improvement, led by robust gross margin expansion and ongoing category development investments. This should translate to strong EBITDA growth,” GCPL said in its quarterly update. Overall consumer demand rose in Q1 FY24 but revenue growth could moderate sequentially as companies made price cuts. Further, falling raw material prices will add to gross margins, opine analysts. “Slight green shoots are visible in rural demand aided by a softer base but still urban areas grow faster. With deflation in key raw materials, gross margins are expected to improve year on year for a majority of our coverage stocks”, analysts at Nuvama Institutional Equities said in a June report.
For Dabur, one of the key contributing factors was the reduction in inflation. Sequential moderation in inflation has positively impacted consumer spending power and is resulting in gradual improvement in offtakes in the industry.
Marico was less optimistic. Demand trends in the sector remained stable during the quarter, although signs of improvement on a sequential basis were not clearly visible, the company said. While urban markets were steady, the anticipated pickup in rural demand remained elusive. Moderating headline inflation, hike in MSPs, easing liquidity pressures and forecast of a near-normal monsoon continue to fuel hopes of a gradual recovery in rural demand in the course of the year, the company said. Brokerage houses have said that unseasonal rains may have a bearing on demand for beverages, cooling hair oil, ice cream and talcum powder segments. Analysts at Kotak Institutional Equities forecast a strong margin recovery-led profit growth for the consumer goods sector with stable volume growth, moderation in pricing and revenue growth and strong EBITDA growth for staples. Rural demand remains soft but the divergence between urban and rural growth would narrow, they said.
On its part, Patanjali Foods reported a 64 per cent decline in its net profit to Rs 87.75 crore in the first quarter of this fiscal year due to a fall in prices of cooking oils.
Its net profit stood at Rs 241.25 crore in the year-ago period. Total income rose to Rs 7,810.50 crore in the April-June quarter of 2023-24 from Rs 7,370.07 crore in the corresponding period of the previous year.
Demand trends across discretionary categories like quick service rest, apparel, footwear and retail remained weak. The last two years were also marked by stubbornly high raw material inflation boosting prices of daily essentials. This was especially true for categories such as edible oils, and biscuits. However, as commodity prices began easing, companies have been making direct price cuts and offering extra grammage. For instance, palm oil prices fell 39 per cent year-on-year. Price cuts were more pronounced in edible oil- while dairy companies hiked prices.
The green shoots of growth seem evident. Investors are looking for more positive performance in the months ahead.
Venkatesh Ganesh