FMCG: GST and urban consumers offer hope
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The packaged consumer goods sector had a difficult time in the December 2016 quarter. Even before demonetisation, demand was simply not getting off the ground. While urban demand had shown some early signs of reviving, companies said rural demand continued to show signs of strain. The BSE FMCG Index declined 4.8% in the December quarter. FMCG stands for fast-moving consumer goods. The current quarter has seen it increase by 13.5%, partly as the effects of demonetisation are fading but also because ITC Ltd’s stock has run up sharply.
Demonetisation made things worse. In cities, consumption was briefly affected but revived as modern trade outlets stepped in and consumers switched to digital currency. However, rural markets were affected. Also, companies use wholesalers to service relatively smaller outlets and markets, and this channel was adversely affected.
In the December quarter, the sector’s sales declined by 2.5%, while its operating profit fell 0.4%. Volume growth was affected, not only by demonetisation, but also by price hikes by companies to compensate for an increase in the price of inputs.
Hindustan Unilever Ltd, for instance, reported a 4% decline in volumes, partly due to the currency ban and partly due to price hikes.
ITC’s shares have gained in the current quarter as the hike in excise duties in the budget was lower than expected and even after an additional cess on cigarettes, the company is expected to benefit from the introduction of the goods and services tax, or GST, from 1 July.
The outlook for packaged consumer goods makers’ stocks remains mixed. Consumer confidence improved in the December quarter, indicating urban markets can be expected to recover. Good monsoon rains in 2016-17 are expected to contribute to better farm output. While that is good, it is being tempered by a moderate increase in prices. By how much farm incomes improve and to what extent non-farm incomes revive will determine rural consumption trends in the medium term. Meanwhile, companies may use price hikes to drive growth till demand recovers. GST remains a key event to watch out for in FY18.