India’s Fast-Moving Consumer Goods (FMCG) sector is showing strong resilience and adaptability, with a positive outlook for the coming quarters, according to a report by Axis Securities.
In the first quarter of FY25, FMCG companies experienced significant revenue growth, driven mainly by a strong recovery in rural demand. Despite challenges like extreme heat in the northern region, increased competition, and the upcoming general elections, many FMCG companies achieved mid to high single-digit growth in revenue.
The growth was largely due to a rise in sales volumes, especially in rural areas. The recovery in rural demand was supported by a normal monsoon, better distribution in rural regions, and the introduction of products tailored to specific regions.
Rural markets not only caught up with but also surpassed urban markets in growth, indicating the sector’s deepening reach in less urbanized areas.
This steady improvement in rural demand is expected to continue, driven by factors like increased government spending, a favorable monsoon, and a promising festive season. These factors are expected to further boost rural demand in the upcoming quarters, strengthening the sector’s growth potential.
However, the growing competition from smaller and regional players is a challenge that companies need to navigate carefully.
After several quarters of strong growth in gross margins, the first quarter of FY25 saw a slowdown in margin growth for many FMCG companies. This was due to high margins in the previous period and fluctuating raw material prices, especially in agricultural products. Additionally, increased spending on advertising to regain market share contributed to a temporary slowdown in EBITDA margin growth. However, these investments are expected to yield long-term benefits, positioning companies for sustained growth in the future.
The Indian FMCG sector is on a growth path, with significant potential for expansion in under-penetrated categories like shampoos and premium detergents. As rural penetration continues to grow, the sector’s growth prospects are further enhanced.
As Indian consumers’ purchasing power increases, there is a noticeable shift towards premium and branded products. Despite the uncertain and complex environment, the FMCG sector stands out for offering strong return ratios like Return on Capital Employed (ROCE), Return on Equity (ROE), and dividend yields. These factors make the sector an attractive option for long-term investment.
In the medium term, the FMCG sector is expected to continue experiencing steady volume growth, driven by increasing rural demand. However, gross margin expansion may remain limited due to high base effects and ongoing investments in advertising, which could delay overall EBITDA margin recovery.
The outlook for the FMCG sector remains positive, with expectations of improved returns driven by domestic consumption. Rural demand is expected to strengthen further, supported by increased government spending, a favorable monsoon, and a strong festive season. However, companies will need to carefully manage the volatility in raw material prices, particularly in the agricultural commodity space.
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