Moneycontrol Pro Panorama | Slow moving consumer goods

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The fast moving consumer goods sector (FMCG) is seen as a bastion of stability by investors, since sales are linked to daily or impulsive consumption habits of consumers. That reason gives frontline FMCG stocks a valuation that’s streets ahead of several other sectors, apart from other reasons such as good management quality and lean balance sheets.
But the December quarter results are making it quite evident that demand for daily essentials can’t be taken for granted. FMCG companies are taking pains to explain the extent to which inflation is a problem, to justify their decision to hike prices.

Nestle India, for instance, says that inflation in its commodity basket was 18.5 percent in 2022, three times the compounded average growth rate between 2018 and 2021. Hindustan Unilever provides a net material inflation growth number, which was at 18 percent in December compared to 11 percent a year ago. Even 11 percent is quite high.

Even a company such as Nestle India, known as urban-focused with a low but fast-growing exposure to the rural market, has not been spared by inflation’s after-effects. A hike in its instant noodles’ low-price pack from Rs 5 to Rs 7 saw some of its customers switch to cheaper competitors. That hit its volume growth in the December quarter, which the management said it had expected will happen, but had little choice given how input costs have risen. But this did not happen only in rural or semi-urban markets, and even big metros saw decline in demand.

It appears that consumers whose household budgets have got affected by inflation, whether in urban or rural India, and whether they are from the middle or lower income groups, are tightening their belts. That inflation in January delivered a shocker with a 6.5 percent print compared to 5.7 percent and even with adjustments due to some data anomaly, it would still be robust at 6.3 percent. Unless household income grows above these levels, consumption in vulnerable income groups will get affected.

The December quarter saw retail sales volumes grow by a mere 1.6 percent in urban areas and fell by 2.8 percent in rural markets. And, that data is reflected in earnings of companies as well. Of course, several companies also said in their earnings’ calls that December was better than October and November. That offers a ray of hope the demand downturn may have bottomed out. But how long it hugs the bottom is a question for which we should get some answers once the March quarter results are out.

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Technical Picks: DLF, Intellect Design, State Bank of India, BEL and Copper (These are published every trading day before markets open and can be read on the app).

Ravi Ananthanarayanan
Moneycontrol Pro