FMCG revenue to fall 2-3 per cent this fiscal: CRISIL

Revenue of the fast-moving consumer goods (FMCG) sector is expected to de-grow 2 to 3 per cent this fiscal, a drastic change from its estimate of 8-10 per cent growth made before the pandemic struck, CRISIL Ratings said on Tuesday.

While the demand and supply shock induced by the Covid-19 pandemic have derailed sales, CRISIL said that softer input prices and pruned ad spends will cushion the impact of the sharp revenue drop on operating profitability, which will still remain healthy at 18-19 per cent (estimated at ~20 per cent in fiscal 2020).

That, along with well-capitalised balance sheets, the limited need to add capacity, and the largely negative working capital nature of the business will ensure credit profiles of FMCG companies remain stable in the current fiscal, the credit rating agency noted.

The assessment is based on an analysis of 57 CRISIL-rated FMCG companies that account for ~50 per cent of the sector’s revenues. It assumes staggered relaxation of lockdown from June 2020 onwards, gradual recovery in sales thereafter, and normalcy in operations from the second half of the current fiscal.

Rural India

Rural India should fare better than urban areas because of higher proportion of essential products consumed, government doles, eased restrictions on agriculture activities, and likelihood of a normal monsoon, it said.

What also augurs well is that prices of key inputs used in packaging, as well as sugar, wheat and palm oil have softened recently on lower demand, it said. Besides, selling and ad spends are likely to be kept under check, with lower discounts and innovative use of cost effective digital advertising. Firms are also focusing on streamlining operations and distribution channels to rein in costs, it noted.

Hence, despite a sharp decline in revenues, operating profitability for the sample set is still expected to remain healthy at 18-19 per cent in fiscal 2021 with marginal moderation of 70-100 bps, said CRISIL.

FMCG sector

The sector has been one of the most resilient among consumer-oriented sectors in terms of credit quality, found CRISIL. “Despite declining revenues, credit profiles of large FMCG companies are likely to remain stable, supported by well-capitalised balance sheets and healthy, liquid surplus. Small firms with lower liquid surplus may resort to higher dependence on external funds to manage additional working capital requirements arising out of the crisis, and their credit metrics are expected to moderate,” said Gautam Shahi, Director, CRISIL Ratings.

Revenue impact

The impact on revenue will vary across FMCG product segments. The proportion of essential products in a segment (foods and beverages, personal care and home care), downtrading, and supply disruptions will determine the extent of decline in revenue, said CRISIL.

“Growth in the food and beverage segment (accounting for ~50 per cent of revenue) will mirror the overall sector’s performance,” said Anuj Sethi, Senior Director, CRISIL Ratings.

Some segments such as ice cream and beverages would see a steeper fall because of revenue loss for the major part of summer, said Sethi.

“The personal care segment (~25% of sector’s revenue), which has the highest proportion of discretionary products, will witness the steepest decline, while the home care segment (~20% of sector’s revenue) will be the least-affected because of its high essentials quotient, and rising hygiene awareness,” he added.

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