FMCG companies to face Q4 volume pressure amid sluggish rural demand

Analysts say rural demand stagnates while urban areas drive low to mid-single-digit volume growth, posing challenges for the sector

Fast-moving consumer goods (FMCG) companies anticipate sustained volume pressures in the January-March quarter (Q4) coupled with sluggish rural growth during the period. 

Brokerages estimate top-line growth to be in low single digits in the quarter. Also, the late onset of winter had an impact on demand for winter products which range from moisturisers to hot beverages. 

While brokerages expect no respite in rural sales, Dabur India said in its pre-quarterly update ahead of its Q4 results that it noticed a pick-up in rural growth fuelled by price rollbacks in staples which led to the gap between rural and urban narrowing. But, it also pointed out, “Demand trends remained sluggish during the quarter.” 

“In Q4FY24, demand for FMCG products faced ongoing challenges, dampening volume growth. There was no meaningful change in the rural growth trends. Factors such as low farm income and the rise of small regional competitors, are adversely affecting larger companies,” said Elara Capital in its earnings preview report on the sector. 

The brokerage also pointed out that Chyawanprash sales lost steam in the quarter ended March, due to delayed winter and have not recovered in Q4. “Food categories continue to outperform home and personal care products. Reviving rural demand is crucial for the FMCG sector, with companies pinning hopes on a favourable monsoon, which could stimulate the rural economy,” it said. 

Nuvama Institutional Equities also noted in its report on the sector that rural demand remains a concern with flat to low single-digit growth in many categories and added that volume growth will remain a challenge with low-to-mid-single-digit volume growth driven by urban.

“Rural demand remains a concern with flat to low single digit growth in many categories,” Nuvama Institutional Equities said in its report. It also said, “Winter demand picked up a bit for winter care products, but distributors were unwilling to stock up much.” The brokerage pointed out that the international businesses of most companies are likely to outperform India operations. 

On the raw material front, Elara Capital said that essential commodities such as crude and palm oil have witnessed a sequential increase but it has not been significant to have an impact on margins as year-on-year growth remains subdued. 

“Companies focus has been focused on offering higher schemes to drive volume and there have been no incremental price cuts,” it pointed out. 

Brokerages expect expansion in gross margins for companies but the pace of expansion will be slow.

Gross margins shall expand (Y-o-Y) for many companies, but the pace of expansion is now small.

Another factor that continues to play out in the January-March quarter is regional firms steadily gaining ground at the expense of larger companies, thus eating into their market share. This has been particularly high in the detergents and biscuits categories. 

“Except for Britannia Industries, ITC, Mrs Bectors Food Specialities and Hindustan Unilever, which could experience a decline in Ebitda margin, other companies are expected to achieve margin expansion,” Elara Capital said in its report. 

 It also said that Companies, such as Colgate Palmolive India, Nestle India, Godrej Consumer Products and Dabur, are anticipated to achieve margin expansion exceeding 250 bp Y-o-Y.

In its outlook, Dabur India said in its update, “While the past year was challenging in terms of consumer demand, we expect improvement in consumption going forward as macro-economic indicators continue to be robust.” 

“Our focus on investing behind our brands, distribution expansion, manufacturing capabilities and organisation will keep us in good stead to capture the opportunities in the marketplace,” the ayurveda FMCG major added.