The tepid recovery in rural demand will help the fast-moving consumer goods (FMCG) sector register a revenue growth of 7-9 per cent in the current fiscal, a report said on Wednesday.
On the other hand, urban demand growth, which constitutes about 65 per cent of the total market, will be stable on a higher base, and the volume demand will come mostly from rural markets, which is 35-40 per cent of overall demand, according to a Crisil Ratings report.
However, the report said product realisations are expected to be range-bound, even moderating in a few categories because of price cuts in cases where raw material prices have moderated.
In contrast, revenue growth in the past two fiscals was driven by higher realisations, it said.
The report also said that the operating margins of FMCG players are likely to see 50-100 basis points of improvement to reach the pre-Covid levels of 20-21 per cent as lower raw material cost, primarily of edible oil, crude derivatives and chemicals, will help offset higher selling and marketing spends.
The report is based on the performance of 76 FMCG companies that account for 35 per cent of the estimated Rs 5.2 lakh-crore sector.
According to Anuj Sethi, a senior director with the agency, after subdued volume growth in the past two fiscals (1-3 per cent), the sector is likely to record a 4-6 per cent volume expansion this fiscal, supported by gradual recovery in rural demand and steady urban demand.
But all this is contingent on not having a serious adverse impact of El Niño conditions on the monsoons.
Rural demand began to recover in the last quarter of FY23 after staying negative for six consecutive quarters. This was supported by growing rural income in the past two quarters, coupled with falling rural inflation. Demand recovery is expected to sustain this fiscal with continuing moderation in inflation, healthy hike in minimum support prices for key crops, and stable non-agricultural income indicators, the agency said.
The urban segment, which grew in double-digits in the past two fiscals, will continue to support overall growth owing to increasing disposable income, continuing growth of e-commerce and contact-based services, and progress on premiumisation in the home care and personal care segments, it added.
Several companies have effected price cuts in key categories such as edible oil and soaps and detergents to stimulate demand as prices of key inputs like crude oil, alkyl benzene and soda ash have softened.
According to Aditya Jhaver, a director with the agency, revenue growth will vary across product segments and companies, but will largely be volume-driven. While food and beverages (50 per cent of the sectoral revenue) is expected to grow 9-10 per cent this fiscal, home care (25 per cent of sectoral revenue) will most likely slow to 6-7 per cent after price cuts. Personal care (25 per cent of sector revenue) will see continued traction growing at 7-8 per cent owing to revival in rural demand and steady urban demand.