Packaged consumer goods: Rural India lags urban recovery
- Egg prices up 40% on tight supply
- Siddharth Parekh’s Paragon Partners raises $120 million for its first PE fund
- Fans will drive the media business: Sudhanshu Vats of Viacom18
- Union Bank of India starts roadshows abroad to raise Rs2,000 crore through QIP
- Rahul Gandhi to take over as Congress president ahead of Gujarat polls
The packaged consumer goods sector’s sales rose 3.7% in the March quarter, recovering from the demonetisation-led 2.5% decline in sales in the preceding quarter. That was the good news. But companies pointed out that it was not a complete recovery, with rural demand still at sub-par levels.
The nascent recovery seen in the rural markets in October, as normal monsoon rainfall saw agricultural incomes improve, was dealt a body blow by demonetisation. While the cash shortage improved, companies said the cash-dependent rural distribution chain had been broken. The next big challenge that looms over growth in the near term is the goods and services tax (GST) rollout starting on 1 July.
On the brighter side, urban consumer demand has recovered quite well. Hindustan Unilever Ltd (HUL) reported a 4% volume growth with its premium products doing well, even mass consumption categories such as detergents. Not everyone fared as well though. Britannia Industries Ltd’s volume growth was just 2%, while Dabur India Ltd’s was 2.4%.
Input costs increased, which saw companies hiking prices in response, but relatively weak consumption held them back from taking steeper price hikes. Companies focused elsewhere to rein in costs, cutting back on advertising and promotion expenses and employee costs and elsewhere. HUL’s operating profit margin rose by 1 percentage point over a year ago to 20.1%, while Godrej Consumer Products Ltd’s margin rose by 1.7 percentage points.
The industry appears comfortable on the profitability front, but the challenge lies in getting sales growth going. The GST rollout has led to fears of de-stocking to avoid losses when the new rates come into force. If that happens, sales growth in the current quarter will get affected. However, once the chaos ends, companies should also benefit from the new tax system.
Apart from GST, a sustained recovery in consumer demand, especially in rural areas, is what the sector needs. The BSE FMCG Index has gained 25% since January, partly due to the worst of the note ban getting behind it and on hopes of a revival in consumer demand. FMCG is short for so-called fast-moving consumer goods. The sector trades at a stiff price-to-earnings multiple of 41 times its trailing 12-month earnings.