FMCG Stocks Poised for Growth with Promising Monsoon Forecast

Narrowing Urban-Rural Growth Gap

The gap between urban and rural growth in India is gradually narrowing. Fast-Moving Consumer Goods (FMCG) players are witnessing a divergence in growth rates between premium and mass segments, with premium products growing stronger. Key commodity prices such as wheat, milk, sugar, and tea have seen quarter-on-quarter (QoQ) moderation, while coffee and cocoa prices have shown inflationary trends. Commodity prices have largely remained stable, leading to stable input costs for paint companies.

Positive Monsoon Forecast

The forecast of an above-normal monsoon for 2024 brings hope to FMCG firms. Private weather agency Skymet predicts normal monsoon rainfall at 102% of the long-period average (LPA), while the India Meteorological Department (IMD) forecasts 106% of the LPA. Good rainfall prospects are a relief for farmers, companies, and consumers who have faced uneven rainfall, El Nino conditions, and food inflation in recent years. However, some experts caution that excessive rainfall could lead to flooding, potentially affecting the harvest season.

Inflation Trends and Consumer Demand

India’s Consumer Price Index (CPI) inflation moderated in Q4FY24, yet consumption recovery remains muted. The Wholesale Price Index (WPI) inflation remains low, and the demand environment continues to be challenging. FMCG demand sentiment during the quarter mirrored trends from Q3FY24. Urban markets continue to outperform rural markets, but price rollbacks due to softening commodity inflation have helped narrow this gap. A gradual recovery is expected in CY2024, driven by moderating inflation, government spending, a positive outlook for the rabi crop harvest, conducive consumer pricing across categories, and the expectation of a normal monsoon.

Impact of Commodity Inflation

Softening commodity inflation is expected to improve gross margins for FMCG companies. However, the demand environment remains muted, with no visible signs of improvement in rural markets or volume growth momentum. Inflation moderation is anticipated to be a key catalyst for rural recovery. Should the monsoon set in as projected, rural sector recovery is expected, which would boost sales in FMCG, tractor, and two-wheeler segments.

Rural Demand and FMCG Growth

FMCG companies such as Marico, Godrej Consumer (GCPL), and Dabur anticipate a recovery in the second half of FY2024-25, driven by stable macro-economic indicators and the prospect of a normal monsoon. Over a third of the FMCG industry’s sales come from rural areas, making rural market performance crucial for double-digit growth. The forecast of a good monsoon this year is expected to bolster rural demand and enhance FMCG prospects.

Financial Performance of Top FMCG Companies

The top five FMCG companies that have experienced increases in QoQ net profit margins and operating margins are listed below:

Conclusion

The forecast of a favourable monsoon in 2024 is poised to positively impact the FMCG sector, particularly in rural markets. The anticipated good rainfall is expected to enhance rural demand, aiding in the recovery of FMCG sales, tractor, and two-wheeler segments. Despite current challenges, the gradual narrowing of the urban-rural growth gap, stable commodity prices, and improved gross margins offer a promising outlook for the FMCG industry. Companies like Marico, Godrej Consumer, and Dabur are optimistic about the future, banking on stable macroeconomic conditions and the predicted normal monsoon to drive growth in the latter half of FY 2024-25.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. The information is based on various secondary sources on the internet and is subject to change. Please consult with a financial expert before making investment decisions.