Special Feature on FMCG Sector

The Indian Fast Moving Consumer Goods (FMCG) market is the fourth largest sector in the country and is one of the most attractive in the world. This is due to the large population consumption in India which is growing at an unprecedented rate, offering plenty of investing opportunities. The sector is expected to increase at a CAGR of 14.9 per cent to reach US$ 220 billion by 2025, from US$ 110 billion in 2020. This growth rate can be attributed to drivers such as the growing youth segment and working women population, rising incomes and rising purchasing power, higher brand consciousness, changing consumer preference, growing urbanization, increase in the number of upper-middle-class, and rising internet penetration. Also, rapid real estate infrastructure development, easy access to credit, increased efficiency due to development in the supply chain, and the growing interest of investors are helping the FMCG sector to grow in India.

Market Size and Government Initiative: The Indian government has been instrumental in the growth of this sector over the years. The FMCG sector is allowed 100 per cent Foreign Direct Investment (FDI) in food processing and single-brand retail and 51 per cent in multi-brand retail. Foreign investment into the sector has bolstered employment, supply chains and brought on high visibility for FMCG brands across organized retail markets which have thereby increased consumer spending and encouraged more product launches. The sector witnessed healthy FDI inflows of US$ 18.59 billion from April 2000 to June 2021. Moreover, the Goods and Services Tax (GST) introduced in 2017 was introduced to transform logistics in the FMCG sector into a modern and efficient model. Earlier manufacturers were required to open a warehouse in every state, to trade in those areas. However, with the introduction of GST, this is no longer necessary and the supply chain has become more efficient. With reduced indirect and logistics costs, the final production of FMCG goods has become cheaper and this has benefitted both manufacturers as well as end consumers.

While India witnessed a catastrophic second wave of COVID19 in Q2 2021—leading to a dip in its macroeconomic indicators—the Indian FMCG industry remained resilient. This was a very different trend as compared to what occurred in the first wave of COVID-19 last year when FMCG industry sales plummeted. Traditional trade channels like grocers and chemists also remained resilient during the recent quarter. Metros in particular had a strong ally in e-commerce to sail through the troubled waters of Q2FY21. The sector was benefited due to the increased preference of consumers for hygiene and in-home consumption. As a result, the Indian FMCG sector fared comparatively better as compared to some of the other sectors in the country.

Financial Performance of FMCG Companies

In Q2FY22 the performance of FMCG companies was affected by a sharp increase in input prices that dragged down OPM to a larger extent than expected. Prices of key raw materials like crude oil, palm oil, and palm fatty acid distillate (PFAD) have risen more than 60 per cent YoY, affecting most consumer categories such as food, packaged food, soaps, detergents, among others. Rising crude prices have also pushed up packaging costs. Adding to this are rising fuel prices impacting transportation costs, and unseasonal rains pushing up vegetable prices. To combat the commodity price inflation, FMCG majors have alluded to input cost pressures in the past two quarters, with the likes of Hindustan Unilever, ITC, P&G, Dabur, Britannia, Parle, Marico, and Godrej hiking prices to offset the input cost burden. However, the impact of price inflation can be seen if we look at the performance of FMCG companies in the first half of FY22. OPM margins have contracted by 185 bps on an average in H1FY22 as compared to H1FY21.

Performance of FMCG stocks

The journey of the FMCG sector has not been the same for 2021. Some of the months saw a spike in the sales whereas, for other months, it had lowered. All the while, the sector has been trying to get past some of the major challenges that plagued the sector for years.

In October 2021, the sector recorded the best growth figures which were about 21 per cent higher than the previous year due to heavy sales in packaged foods, commodities, etc. Overall, for the rest of the months, the sector grew by around 10-20 per cent, whereas, in September 2021, the revenue plunged.

On a YTD basis, the returns from FMCG companies have rallied more than 1300 per cent. GRM Overseas is the top gaining company registering returns of 1,352.6 per cent on a YTD basis followed by Lotus Chocolate Company and Goldcoin Health foods zooming 372.17 per cent and 348.08 per cent, respectively.

Outlook

FMCG makers are pacing up digitalization and are investing in building capability in e-commerce and Direct-to-Consumer channels, identifying it as a key ingredient of growth as the threat of a possible third wave is still not away. The FMCG industry is also facing inflationary pressure due to a rise in the cost of key materials inputs such as palm oil and packaging material, and transport cost and it may also go for another round of price hikes in the first quarter of 2022.

Although raw material inflation is expected to remain in the coming quarters, calibrated price hikes in the product portfolio and stringent cost-saving measures by FMCG companies will reduce the stress on the margins. A key positive to note is that urban demand is recovering and October was good for most of the companies with the sector witnessing strong double-digit growth largely led by festive demand. Hence, in the FMCG segment, with evolving buying habits, e-commerce as a channel has grown significantly and expect this trend to continue in 2022.