Will FMCG sector enjoy monsoon this year?

Weak consumer demand in March quarter have affected the volume growth of the fast moving consumer goods (FMCG) sector. Although, the FMCG sector was facing tough time with their decline in volume, its profitability surprisingly rose.

According to report in Livemint, volume growth dropped to 4% for Hindustan Unilever which has managed to attain 6-7%-levels in preceding four quarters. Also Godrej Consumer too saw volume growth of 6% compared to 9% in the preceding quarter.

In spite of weak volume, FMCG sector’s net sales rose to 5.7% from 1.4% and 0.5% of December and September quarter. Input cost grew to 2.9% against the decline of 5.4% in preceding quarter, which further resulted decline in gross profit margin.

Noticeably, the sectors operating profit grew by 11.8% for March quarter compared to just 2% growth recorded in the two preceding quarters.

One reason behind such unexpected growth was rise in inflation for two consecutive months due to rise in food inflation.

The consumer price index for May 2016, rose 5.8% from 5.4% in April, reaching two years high. This was largely driven by rise in food inflation which stood at 7.55% from 6.40% of the previous month.  

Will the monsoon prediction bring in good news for FMCG sector? Is it just the Agriculture to see “Ache Din” or even FMCG too can relish from it?

Analysts predict inflation to ease down due to favourable monsoon, the FMCG sector is likely to sustain volume growth and with it better profitability.

The Indian Meteorological Department foretasted monsoon with rainfall at 106% in 2016. Also, it expects a 50% chance of a La Nina occurrence, which results in ample rainfall across India.

During this monsoon, India’s rural region will see an uptick after struggling for two subsequent years. According to ET Brand equity reports, consumer companies expect rural demand to surge for them, however not all of them are revising their sales growth trajectory.

"While a substantial part of the growth will still be volume led, we do expect some price-led growth to return in the sector in the latter half of the year, given some of the recent trends in commodity prices," said Vivek Gambhir, managing director at GCPL in the report. 

Consumer firms are trying to lift their reach in the rural market, in order to benefit from improvement in consumer confidence. Dabur plan its rural distribution footprint to touch 65,000 villages by the end of the current financial year, up from the existing 50,000.

The largest selling biscuit brand, Parle Products, whose half of the sales are derived from rural markets, is revising its sales estimates by 30%.

Mayank Shah, the marketing head stated that, the company believes monsoon prediction is a strong indicator to end the uncertainty of estimating growth projections.