FMCG Q1 review: Not just base effect, these other factors drove volume growth

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Vineeta Sharma

One of the key highlights of the just-concluded quarterly results season has been the double-digit volume growth reported by fast moving consumer goods (FMCG) majors. Volume growth of the top 10 listed FMCG players hit a multi-year high of 13 percent year-on-year (YoY) in Q1FY19.

While early analysis suggested the high volume growth could have been just a base impact, a deep dive into the numbers shows it is not so. Volume growth this time appears more structural and augurs well for the stock performance of FMCG sector going ahead.

FY17 and FY18 saw major disruptions in Indian Businesses due to demonetisation in Q3FY17 and then GST rollout in Q2FY18. Between these periods, along with other industries, FMCG players witnessed sharp volume degrowth during this period.

A quick comparison on volume growth for the top FMCG players - Hindustan Unilever, Godrej Consumer Products, Britannia, Dabur, and Marico, before demonetisation (from Q1FY13 to Q2FY17) and after it (Q3FY17 and Q1FY18) shows a fall in average growth from 7 percent YoY to 2 percent.

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Vineeta Sharma

Head of Research|Narnolia Financial Advisors

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But after Q1FY18, the average volume growth has risen to 11 percent YoY. In fact, for the leader of the pack, Hindustan Unilever the growth in the last quarter jumped to 12 percent from 5 percent pre-demonetisation and GST and 1 percent during the quarters the twin events played spoilsport. This points out the company is reporting higher than the base rate of growth it had been reporting since FY13.

Similarly, Godrej Consumer's domestic volumes grew 14 percent in Q1 against the normal average of 9 percent. For Britannia, it was 13 percent growth over an average 7 percent since FY13. Dabur also had a 21 percent volume growth against longterm average of 8 percent.

Interestingly, the growth in FMCG is being driven by rural as well as urban demand. Rural wage inflation which fell from 2013 to 2016 has started rising. An increase in the MSP and good monsoon are supporting the rural income and subsequently the volume growth. In their post-result analyst conference calls, the management of most companies hinted of a recovery in the urban growth as well.

The management of Godrej Consumer clearly said consumer demand is improving and they expect the recovery to sustain. Dabur said green shoots are visible in rural demand led by a good monsoon and government initiatives. Even, Emami said it is witnessing growth across the urban and rural market and expects it to sustain.

Companies are hinting that supply-related disruptions are behind and that most of them are expanding distribution reach and investing in strategies to optimise the channel. Margins are also expected to sustain. All these metrics hint at outperformance by FMCG stocks going ahead.

Disclaimer: The author is Head of Research at Narnolia Financial Advisors. The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.