Listed FMCG companies saw a 4.1 percent y-o-y increase in net sales and a 4.3 percent increase in net profits in the quarter ended March 2024. Net profit margin continued to glide on a declining gradient as it has been since 2020. At 10.24 percent it was the worst in five years. But conditions are ripe for a better performance in 2024-25.
FMCG margins continue to remain higher than the average margin of listed companies. Besides, the slide in margins seems to be slowly grinding to a halt. The challenge FMCG companies face is anaemic expansion of their market. The 4.1 percent growth in net sales in the March 2024 quarter was below the consumer inflation rate, which was over 5 percent. This implies a contraction in volumes.
The 4.1 percent growth in net sales was the best performance FMCG companies could deliver in a year. And even this implies a contraction in real sales. Net sales grew by between 0.5 and 3 percent y-o-y in the three preceding quarters when inflation averaged well over 5 percent. Shrinking volumes seems to be a major challenge for FMCG companies.
A large part of the growth of FMCG companies is derived from rural markets. These markets suffered poor monsoons in 2023-24 and the crop output shrunk. According to official estimates, output of most major crops declined. Overall crop output was down by 2.4 percent. This is the largest fall in crop output in almost a decade. Agricultural output as a whole including livestock, fisheries and forestry saw an increase of 1.4 percent. This was agriculture’s worst performance in eight years. The impact on FMCG companies is evident in their inability to expand their markets.
The terms of trade worked in favour of FMCG companies. While the consumer prices rose by 5.4 percent in 2023-24, wholesale prices (which is the price index for input costs) declined by 0.7 percent in the same year. In particular, the wholesale prices of oilseeds declined by 9.8 percent in the year.
As a result, FMCG companies benefitted from a fall in raw material costs. This is evident in the financial statements of listed FMCG companies. Expenditure on raw materials, stores and spares of these companies declined y-o-y by 1.2 percent in the March 2024 quarter. In the last four quarters these expenses have declined y-o-y in three. Raw material purchases account for about two-thirds of the total operating cost of FMCG companies. Total operating expenses grew by 3 percent y-o-y in the quarter ended March 2024.
This lower growth in operating expenses compared to total sales helped the operating profit of listed FMCG companies grow by a healthy 7.2 percent.
But, interest expenses pencilled a 27.8 percent increase, depreciation grew 8.2 percent and tax provisions were up 11.6 percent. All this dragged the net profit growth down to 4.3 percent.
We expect FMCG companies to do much better in 2024-25. The agricultural sector is expected to do better. Monsoons arrived on time, have progressed well and are forecast to do well this year. Inflation is in control although it is still not touching the target 4 percent. We expect inflation to be around 4.5 percent in the year. Input prices are also likely to remain comfortable. Finally, rural consumer sentiments have been upbeat in recent times.
Growth among modest income households in urban areas could remain a challenge as employment remains a concern in the cities. The urban unemployment rate is high at about 8.6 percent while rural unemployment rate is under 7 percent.
The above analysis is based on the quarterly financial statements of 157 listed FMCG companies covering principally, the personal & home care products industries (which includes Hindustan Unilever and Godrej Consumer Products), processed foods industries (including Nestle, Varun Beverages), other consumer goods (Gillette) industries among others. Collectively, these companies had a total net sales of Rs.1.2 trillion in the quarter of March 2024 and Rs.4.7 trillion in 2023-24.
