Rural push to boost FMCG companies' topline next year: Report

The fast moving consumer goods (FMCG) sector, which has been down in the dumps in the past two years with a tepid 4 per cent revenue growth, is poised for a "mean revision" with government shifting its focus towards boosting growth ahead of the next hustings.

The sector, which has been subdued lately, saw an annual revenue growth of 13 per cent through the last decade, says an HDFC Securities report today.

"There is significant scope for an upward revision in revenue growth in the next year, with government shifting focus towards boosting GDP ahead of the Lok Sabha elections in the Summer of 2019," the report said but did not offer a growth number.

Blaming the challenges in rural markets, low wage growth and a deficient monsoon in FY15 and FY16 for the poor revenue growth, the report said the sector was further bruised with unprecedented events like demonetisation and GST in FY17.

But the report warned that "most macro indicators like rural wages, agricultural growth, minimum support prices (MSPs), job creation and RBI's consumer confidence index) are still not reflecting a meaningful recovery."

However, an expected shift in government focus from stabilising the economy to accelerating growth in the run-up to the 2019 elections will take the sector to better future.

The report points out that most FMCG companies have seen improved revenue growth after GST rollout, and most trade channels have begun to normalise after GST shocks.

"There is significant scope for a mean revision towards its 10-year annual revenue growth of 13 per cent," the report noted.

Most companies are witnessing green-shoots in the rural market, and expect that government focus on improving rural incomes will boost demand, it said, adding companies with a higher exposure to rural markets "can surprise on growth."

It also said modern trade and e-commerce will continue to grab share from general trade, leading to better traction in the urban market, thus placing the sector for accelerated earnings.

"Pricing power, lower commodity prices, supply chain efficiencies and cost optimisation have helped boost operating margins for the sector so far, and this can further improve by about 150 bps in the next few years, led by higher revenue growth, rising premiumisation, GST-driven efficiencies and cost optimization," it concluded.