After facing challenging times due to inflationary pressures and macroeconomic headwinds, FMCG companies are expected to see an improvement in margins in FY24, but rural demand recovery would be gradual.

A report released by Nuvama Institutional Equities said inflationary pressures and high-priced inventories adversely impacted margins in the first nine months of FY 23. In response, FMCG and consumer goods companies took price hikes and focused on cost-cutting measures. While raw materials remained elevated during this period, high inflation in fertilisers and diesel, coupled with low rainfall in populous states, hurt rural demand.

“ Now, as raw material prices cool off, companies are paring prices via grammage increase and gradual price reductions. Even so, the reduction in final prices (a mix of grammage + price cuts) is typically much smaller. As a result, we expect margins to trend up for a number of large consumer companies,” Abneesh Roy, Executive Director, Nuvama Institutional Equities, noted in the report.

The report also pointed out that other factors, including a scale-up in new product launches, margin-accretive acquisitions, and strengthened distribution channels will also help in shoring up margins.

Urban versus rural consumption

Urban consumption trends outpaced rural demand trends, particularly in the premium and luxury categories. The report said while rural demand is expected to improve in FY24, recovery will be gradual due to factors such as uncertainty around El Nino’s impact.

“We believe rural demand would improve in FY24, driven by factors such as a low base, easing inflationary pressure and high flow of subsidies to rural regions, as state/ general elections are slated for CY23/ CY24. There are expectations of a good harvest and monsoon (watch out for El Nino though). Modern trade/ e-commerce channels are also picking up in tier-2 and below cities, which helps in faster penetration of premium products. There is a structural shift in the rural population moving to non-farm/ better-paying jobs. To be fair, one must acknowledge that El Niño is rearing its head just as a plethora of rural issues are being hammered out,” the Nuvama report said.

In the past nine months, consumers have focused on buying smaller packs to combat inflationary pressures. But now consumers seem to be back to buying regular or mid-priced packs

“Sales of mid-priced or regular packs in fast-moving consumer goods have started picking up after several months in Q4FY23, particularly in categories such as snacks, biscuits, edible oils and detergents. This implies consumers have started loosening their purse strings a bit more than before, which may aid the sector’s recovery,” the report noted.