A revival in rural demand may help boost the topline growth of the Rs 3.4-trillion fast moving consumer goods (FMCG) sector by 300-400 basis points to 11-12 per cent this financial year, said a report.
The FMCG sector is likely to report 11-12 per cent rise in revenue in fiscal 2019, up 300-400 basis points from 8 per cent in fiscal 2018, driven by revival in rural demand and new product launches, domestic rating agency Crisil said in a report today.
This will lead to a significant improvement in their operating performance and benefit credit profiles, it added.
The rural economy may get a leg-up from the higher minimum support prices (MSP) announced by the Centre and also favourable monsoon rainfall, more non-agriculture rural employment, which in turn will increase farmers' disposable income, leading to consumption demand.
From the marketers' side, continuing product launches and greater acceptance of ayurvedic and herbal products will also help.
"Therefore, revenue growth from the rural segment which contributes 40-45 per cent of the total income of the sector, will improve to 15-16 per cent in fiscal 2019 compared to 10 per cent estimated for fiscal 2018," the report said.
Growth had recovered partially from the 5-percentage point range during fiscals 2016 and 2017, according to Crisil, a period that saw sluggish rural demand resulting from weak monsoons, intense competition and demonetisation.
On the other hand, revenue growth from the urban segment is expected to stay steady at 8 per cent in FY19.
While mid-sized and medium-sized firms will have an edge because of better operating efficiencies in the GST regime and may clip at 15-17 per cent, according to the report, large firms are seen growing topline by 300-400 bps to 11-12 per cent.
On the other hand, smaller firms will continue to be buffeted by competition and GST, and register modest growth.
"Given the prospects, we see large and mid-sized firms augmenting growth through two flanks: acquisitions and new launches," said Anuj Sethi, senior director, Crisil Ratings.
"Small regional players with established brands are likely to be acquired by larger peers, even if such deals are expensive, to reduce time to market," he added.
Operating profit of large and mid-sized firms is expected to sustain at double-digits but rising cost and higher promotional spend will largely be offset by savings on logistics, transportation and from supply chain efficiencies.
On improvement in credit profile of these companies, the report expects the positive trend in credit ratio to sustain for large and mid-sized firms driven by improving business profiles.
According to Amit Bhave, director, Crisil Ratings, healthy cash generation and prudent working capital management, along with deep pockets will allow for higher spend on acquisitions.