India’s largest fast moving consumer goods (FMCG) firms are expected to record another tepid quarter of volume growth as makers of soaps and hair oils continue to face headwinds both in rural and urban markets.
Firms across the board have been reeling from a cooling off in consumer demand, aggravated by a slowdown in rural markets, a liquidity crunch among traders and wholesalers, and flooding in parts of the country that has dented demand for goods of daily use.
FMCG companies from Hindustan Unilever Ltd (HUL) to Nestle India Ltd are set to announce their earnings for the September quarter. HUL, which sells Lux soaps and Knorr soups and is considered the bellwether for the FMCG sector, will announce its September quarter earnings on Monday. Its commentary on urban and rural demand will help market watchers gauge the demand for goods of daily use such as soaps, shampoos and detergents.
On an average, analysts expect packaged consumer goods firms to register revenue growth between 6.4% and 9.3% while recording volume growth between 3% and 6%, according to estimates by several brokerage firms. Analysts expect volume to grow at a modest pace during the quarter.
“We expect most consumer goods companies to report low single-digit volume growth," Abneesh Roy at Edelweiss Research said in a report last week, citing macroeconomic factors such as the liquidity crisis that has hurt wholesalers as well as retailers, weak overall macroeconomic scenario, and slower ramp-up of the PM-Kisan scheme.
The second quarter of the current fiscal year, the report said, is “likely to mark the slowest volume growth for consumer goods companies since Q1FY18, which was impacted by goods and service tax-related de-stocking." Volume growth for FMCG companies dropped by 3.7% in Q1FY18, according to data from Edelweiss.
The news isn’t surprising. In July, research firm Nielsen had slashed its annual outlook for the FMCG sector on the back of a weak monsoon and stagnating rural incomes, especially lowering its growth forecast for the second half of the year to 9-10% from its previous forecast of 11-12%. Nielsen follows a January to December calendar year.
More recently, in September, Credit Suisse warned that India’s FMCG companies could post their slowest revenue growth in FY20 in the last 15 years as lower farm incomes, the liquidity crunch and rising unemployment mar growth at makers of packaged foods and soaps.
Nielsen had also warned of a sharp slowdown in rural growth, which has historically remained ahead of urban markets. Rural growth is slowing down double the rate of urban in recent quarters, Nielsen noted in its second quarter update for the sector. Rural India accounts for 37% of overall FMCG spends. “After eight quarters of continued outperformance, rural growth slipped below urban growth for several consumer staple companies in Q2FY20," research analysts at Motilal Oswal said in a note last week. The analysts maintained that the operating environment in Q2FY20 was perhaps the most sombre since the June 2017 quarter (Q1FY18), following the implementation of GST in the previous month. The brokerage has pegged HUL’s sales growth for the September quarter at 7% year-on-year and volume growth at 6%.