Packaged consumer goods firms saw sales growth improve in the March quarter. There was a base effect at work as the continuing effects of demonetisation had affected sales in the year-ago quarter. The roll-out of the goods and services tax (GST) had also affected business in FY18. The normalization of business saw firms report higher volume growth.

But it was not only the low base effect that helped. Rural consumption is reviving and a major engine for growth of consumer firms is revving up. A good monsoon forecast for the current fiscal has also raised hopes that this trend may continue well through FY19. If it does, it will fill a missing gap in the fast-moving consumer goods (FMCG) industry’s growth in the past few years. The urban market continues to see demand sustain.

The sum of these factors was why Hindustan Unilever Ltd reported an 11% volume growth over a year ago, Godrej Consumer Products Ltd posted a 6% volume growth (19% in soaps) and Dabur India Ltd reported a 7.7% volume growth. Most of the sales growth was driven by volumes with price increases and product mix playing a limited role.

The continuing benefits from the roll-out of GST, which confers benefits in the form of input tax credit on eligible inputs, has seen their Ebitda growth improve as well.

Firms are entering FY19 confident that the recovery is likely to continue. This is what investors, too, will be focusing upon, whether the past two quarters’ recovery can sustain, even after discounting the low base effect. In the near term, rural consumption will continue to dominate attention, with eyes on how the monsoon actually pans out.

ITC Ltd remains an exception, in that its FMCG business has seen growth recover but its cigarettes business continues to see a decline in volume growth due to the steep increase in cess.

One worry for firms is an increase in crude prices, which could see related input costs rise. Since demand is improving, rising costs can be passed on to consumers by hiking prices. Also, firms have lowered prices to share benefits of GST, which gives them headroom to increase prices, without affecting demand by much. The BSE FMCG Index is up by 10% since 20 March and up by 14% over a year ago. It remains a richly valued sector with a price-to-earnings multiple of 42 times its trailing 12-month earnings.