Home >Markets >Mark To Market >FMCG revenue growth falls to 3.4% in Q3, and the worst may not be over
The demand slowdown is hitting hard and companies are seeking to persuade the Indian consumers to loosen their purse strings. (Ramesh Pathania/Mint )
The demand slowdown is hitting hard and companies are seeking to persuade the Indian consumers to loosen their purse strings. (Ramesh Pathania/Mint )

FMCG revenue growth falls to 3.4% in Q3, and the worst may not be over

  • The demand slowdown is hitting hard and companies are seeking to persuade the Indian consumers to loosen their purse strings
  • Even so, some firms were able to withstand the pressures relatively better than others

The Nifty FMCG index has gained marginally so far in 2020, faring better compared to the 2.8% decline in the broader Nifty 50 index. This is at a time when December quarter results of fast-moving consumer goods (FMCG) companies are far from encouraging. Cast your eyes on the chart alongside. Last quarter’s year-on-year revenue growth of consumer staples firms under Kotak Institutional Equities’ coverage had dropped to 3.4%, the slowest performance in the past many quarters.

The demand slowdown is hitting hard and companies are seeking to persuade the Indian consumers to loosen their purse strings. Even so, some firms were able to withstand the pressures relatively better than others. For instance, market leader, Hindustan Unilever Ltd (HUL) saw an underlying volume growth of 5%, which pleased many analysts even though operating revenue lagged Street estimates slightly. Nestlé India Ltd’s revenue growth of 8.7% is much better than peers. The worst performer of the lot was Bajaj Consumer Care Ltd, whose revenue fell 7.9%. Marico Ltd too didn’t fare well, posting a 2% drop in consolidated revenue.

On the brighter side, a favourable raw material cost environment and a tight leash on costs helped on the profitability front. Kotak’s consumer staples’ aggregate profit after tax growth for the December quarter stood at 18.4%, a shade worse than 20.1% seen in the September quarter.

So far, so good. But investors can’t breathe easy. As such, demand environment remains tough. “With absent meaningful stimulus measures in the Union Budget, companies have now extended their expectations for a recovery by 2-3 quarters. Rural growth has remained sub-par, and we are concerned by the incremental pressure on companies from urban growth moderation," said analysts from SBICAP Securities Ltd in a report on 13 February.

Demand in the rural market continued to lag behind the urban market at 0.5 times of urban growth. Note that some quarters ago, rural markets were growing faster.

“Most managements sounded (1) guarded on near-term growth prognosis, and (2) unsure of what will lift sentiments and growth trajectory," said Kotak analysts in a report on 18 February, which included analysis of both consumer staples’ and consumer discretionary firms.

Be that as it may, shares of many FMCG firms, including HUL, Nestlé India and Dabur India Ltd have touched new 52-week trading highs in 2020, making stock valuations pricier.

Analysts reckon that the Street is rewarding companies that are able to perform relatively better at a time when India’s real gross domestic product growth dropped to 4.5% in the September quarter. “We expect the sector to continue to find preference due to the relative edge in a slowdown environment, with the TINA (there is no alternative) effect," points out SBICAP.

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