As FMCG cos move towards better growth in 2021, some risks and questions remain2 min read . Updated: 07 Jan 2021, 05:01 PM IST
- While consumer staples firms faced initial disruptions due to the pandemic, by the September quarter, things were looking much better. The improving momentum is expected to continue in the December quarter as well
The fast-moving consumer goods (FMCG) sector has been relatively cushioned during the pandemic. That’s not surprising. Most FMCG products were categorized as essential when the covid-19 lockdown began. True, even within FMCG companies, products that were discretionary in nature, were impacted adversely. But to that extent, demand for essentials in the portfolio, helped.
While consumer staples firms faced initial disruptions due to the pandemic, by the September quarter, things were looking much better. The improving momentum is expected to continue in the December quarter as well and more clarity would emerge when firms announce their financial results in the coming days.
In this backdrop, what does 2021 bring for FMCG companies?
For one, growth is expected to be better. In a report on 7 January, analysts from Jefferies India Pvt. Ltd wrote, “Macro indicators have been improving, which augurs well for consumption, and, along with low base, should drive double-digit revenue growth in FY22 at 13%." This is on an aggregate basis for consumer companies under Jefferies’ coverage (excluding ITC Ltd and Varun Beverages Ltd).
According to the broking firm, this would be the highest growth since FY13, with all companies witnessing double-digit growth. “While this (FY22 growth) would be mainly driven by volumes, mix and price hikes should also contribute," said Jefferies analysts.
JM Financial Institutional Securities Ltd has factored in 14% revenue growth for FY22E, which would be more than three times FY21 growth. “A large part of this recovery hinges upon how the discretionary and out-of-home portfolios of HUL (cosmetics, skin, deos, icecreams etc) pick up once the era of confined living is done with. Hindustan Unilever Ltd (HUL) is indeed one staples business that has yet to benefit from ‘unlocking’ of the economy," said JM Financial analysts in a report on 1 January.
On the flip side, companies such as Britannia Industries Ltd that benefited from the increase in at-home consumption, are expected to see moderation in this year. In fact, evaporating covid-19 tailwinds remain a key risk for 2021, point out analysts. ICICI Securities Ltd’s analysts said, “Consumers going back to pre-covid behaviour could be a big risk to growth in FY22." The brokerage firm added in a report last month, “Increased buying of health and hygiene products have been the key driver for growth for many of these companies. However, after an initial frenzy for sanitisers, sales for the category have dropped significantly sequentially."
Another factor to watch out for in the coming year would be on the costs front and in turn, the impact on profitability. “Whilst nearly all businesses resorted to ‘cost-efficiencies’ to protect profitability, given revenue uncertainty during the lockdown, now that sales are back to earlier levels, does a leaner cost-structure (cost-savings are guided to be partly sustainable) imply that the pandemic has helped make consumer businesses even more profitable than they already were?" said JM Financial analysts.
Overall, even as 2021 is set to be better than 2020 for FMCG companies, investors would do well to follow how things progress on the above-mentioned factors.