Geojit Financial Services Head of Research, Vinod Nair, sheds light on India’s FMCG (Fast Moving Consumer Goods) market becoming amongst the poorest performers in over 18 months amid rising food inflation and falling urban demand growth rate.
The FMCG sector has been one of the poorest performers over the past 18 months. The return of Nifty FMCG, Nifty50, and Nifty500 indexes in the last 1 year is 10%, 20%, and 27%, respectively. This indicates that the FMCG sector underperformed the broader Nifty500 market by 63%.The sector’s performance worsened in July 2023 due to a below-average monsoon, which was further impacted by irregular rains and heatwaves from 2023 to 2024. These conditions affected food grain production for both Kharif and Rabi seasons, disrupting the rural economy and increasing food inflation. As a result, input costs rose, negatively impacting the revenue and margins of companies in the sector.
Driven by start-ups, Indian FMCG firms are also at the forefront of disruption. The rise of consumer tech companies has led to the launch of innovative and healthier products. These start-ups leverage their own e-commerce apps and major platforms like Instagram, Facebook, and Amazon for marketing and distribution. Start-ups are using a heavily discounted pricing model to attract customers and increase penetration. Changing customer preferences, influenced by higher incomes, health consciousness, localization, and access to better products and innovation, are impacting the FMCG sector and Quick Service Restaurants.
Urban demand, which accounts for about 2/3rd of FMCG business, volume growth more than halved in 2024 due to an increase in food inflation, moderation in disposable income, and reduction in central & state expenditure. National and eight state elections in 2024 affected the dispersal and expenditure approvals. Reduction in government spending affected the income of urban customers.
Throughout the year, the FMCG industry faced inventory and distribution losses due to rapid changes in distribution channels. Urban demand is witnessing an increasing shift to Quick commerce while impacting Kinaras volumes. In a sense it is good for FMCG as earnings are higher due to premiumization and low distribution costs. But in the short-term, closure and reduction of demand from small shops and retailers affected volume growth & inventory loss. Also new large entrants like Reliance Consumer are eating market share by providing low product entry price and more than industry commission to wholesalers and retailers, which can continue in the slow to medium-term.
The industry faced challenges in the last 1½ yrs. However, the outlook is expected to improve as the climate forecast for 2024-2025 is favourable. After the good 2024 monsoon, food inflation is forecast to reduce in 2025 due to bumper kharif production. The post 2024 monsoon climate is expected to be lucrative for Rabi cultivation led by neutral to positive La-Nina, the opposite of EL-Nino experienced in 2024, and better reservoir levels compared to last year.
This is expected to have a dual benefit: improving rural demand and reducing food grain prices. A reduction in food inflation will benefit an increase in urban disposable income and a reduction in input costs of FMCG players, thus increasing margins. Urban demand is also anticipated to rise as central and state expenditures will accelerate in the second half of FY25 to make up for lower-than-budgeted spending in the first half. Additionally, volumes will be supported by the festive and marriage seasons in the short term.
The valuation of the FMCG industry has moderated to the near 10yrs average due to below par revenue and profit growth. Industry heavyweights are now available at lucrative valuations. As demand & profitability outlook is expected to be better, the valuations are likely to improve. The industry is aware of the disruptive nature of the ConsumerTech companies, which ballooned in the post-COVID online-driven business models and rise in private equity funding. Initially, these companies used equity funds to offer significant market discounts to attract volumes. However, sustaining this growth will become challenging as new capital and capex requirements increases, especially in the forecast tightening financial market.
The majority of ideas will have to face challenges unless they find a unique product and a long-term investor. Many FMCG companies are considering acquiring such ideas to align with their business objectives, diversify, or reduce competition. Indian FMCG have a strong and larger product line. Their operational profitability and balance sheet are the best in the industry, with lean working capital, low capex requirements, and high RoE. They are better placed to handle a change in consumers preferences with a fore of access in capital, capacity and distribution.
First published in Mint