FMCG revenue to de-grow 2-3% in FY21: Crisil Ratings

India’s fast moving consumer goods sector (FMCG) could see a 2 - 3% drop in revenue in FY21, as immobility of supply chain accompanied by demand shock and diminished incomes due to the pandemic strain sales of packaged foods, and personal care goods going forward, Crisil Ratings said in a note on Tuesday.

The assessment is based on an analysis of 57 Crisil-rated FMCG companies that account for roughly 50% of the sector’s revenues.

"The sector is expected to de-grow 2-3% this fiscal, a drastic change from our estimate of 8-10% growth made before the pandemic struck," Crisil Ratings said in a press note.

Crisil’s estimates paint a bleak picture for the consumer goods sector, as opposed to market researcher Nielsen, that has estimated a 5-6% growth for the FMCG sector in 2020, although down from its earlier projection of 9-10%.

The rating firm's estimates are based on a staggered relaxation of lockdown from June 2020 onwards.

India’s fast moving consumer goods sector has seen business disrupt as the country’s initial lockdown starting 25 March prompted several large companies such as Dabur India, Nestle India, Godrej Consumer Products and others, to temporarily suspend operations and functioning in their warehouses.

While, companies eventually moved to commence operations, they are steadily building their reach in the market.

“The demand and supply shock induced by the Covid-19 pandemic, caused by very limited mobility and supply-chain disruptions during the lockdown, and lower income visibility for consumers, have derailed sales,” Crisil said as it moved to lower its earlier growth forecast for the sectror.

Interestingly, not all categories of packaged goods will see weak demand.

Essential products such as packaged food and beverages that form a bulk of FMCG demand have seen a spike in demand as consumers stuck at home have continued to stock up on packaged foods, and staples.

Ice-cream and cold beverages, however, have missed out on peak summer sales. Whereas, personal care products will witness the steepest decline, analysts at Crisil Ratings estimate.

“Growth in the food and beverage segment (accounting for 50% of revenue) will mirror the overall sector’s performance. Some segments such as ice cream and beverages would see a steeper fall because of revenue loss for the major part of summer," Anuj Sethi, senior director, Crisil Ratings, said.

"The personal care segment which has the highest proportion of discretionary products, will witness the steepest decline, while the home care segment, that accounts for an estimated 20% of sector’s revenue, will be the least-affected because of its high essentials quotient, and rising hygiene awareness,” Sethi said.

An exodus of migrant workers from urban back to villages and the likelihood of a normal monsoon will help keep rural demand intact. "Rural India should fare better than urban areas because of higher proportion of essential products consumed, government doles, eased restrictions on agriculture activities, and likelihood of a normal monsoon,” the note said.

Moroever, companies are also doing more to keep costs under control.

Input costs such as sugar and wheat have been soft, while companies have also lowered marketing and promotional spends as they focus on bringing supplies back in to the market.

This, will help companies achieve healthy operating profitability in FY21.

"Prices of key inputs used in packaging, as well as sugar, wheat and palm oil have softened recently on lower demand. Besides, selling and ad spends are likely to be kept under check, with lower discounts and innovative use of cost effective digital advertising," the note said.

"That, along with well-capitalized balance sheets, limited need to add capacity, and largely negative working capital nature of the business will ensure credit profiles of FMCG companies remain stable in the current fiscal,” Crisil Ratings said in its note.