Consumer companies had good news for shareholders in the December quarter.

To be sure, there was a low base effect in the year ago quarter, when demonetisation had affected sales.

Also, the September quarter revenue had been disrupted by the roll-out of the goods and services tax (GST). So the December quarter benefited due to the recovery from these one-off events.

Most companies reported double-digit volume sales growth, with market leader Hindustan Unilever Ltd’s domestic business posting an 11% volume growth, while value sales grew by 17%.

This was repeated at other companies, too, with Dabur India Ltd’s volume growth at 13%, Marico Ltd’s at 9.4% and Godrej Consumer Products Ltd by 18%.

While ITC Ltd’s consumer business saw comparable value sales growth of 16.2%, its cigarette business suffered due to the high cess levied, and pulled down overall sales growth.

Most companies said that consumer demand is now growing, with rural demand also picking up, although not to the extent that was seen some years ago.

Urban demand continues to recover.

Companies are hopeful that rural demand will improve further in FY19. While consumer staples have seen demand pick up, discretionary consumption has not done as well.

With the initial disruption due to GST fading, the anti-profiteering law dangles over their heads.

Companies are likely to be very cautious on increasing prices, so that they don’t attract scrutiny.

This is a potential risk to margins in the near term, especially as petroleum-related inputs are turning expensive.

Most companies saw their profitability improve. The conditions seem right for packaged consumer goods companies to do better. As economic growth improves, consumption demand should get better and, hopefully, the rural markets will do better in FY19.

While the outlook may seem good, valuations already reflect that optimism in good measure. The S&P BSE FMCG Index is trading at a price to earnings multiple of 41 times its trailing 12-month earnings. The risks to this valuation are if rural demand remains weak in FY19 or if inflation eats into consumer budgets and hits demand.

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