Revenue of the fast-moving consumer goods (FMCG) sector is expected to de-grow 2-3% this fiscal, a drastic change from our estimate of 8-10% growth made before the pandemic struck. The demand and supply shock induced by the Covid-19 pandemic, caused by very limited mobility and supply-chain disruptions during the lockdown, and lower income visibility for consumers, have derailed sales.

However, 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% (estimated at ~20% in fiscal 2020). That, along with well-capitalised balance sheets, limited need to add capacity, and largely negative working capital nature of the business will ensure credit profiles of FMCG companies remain stable in the current fiscal.

The assessment is based on an analysis of 57 Crisil-rated FMCG companies that account for ~50% 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.

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.

Says Anuj Sethi, Senior Director, Crisil Ratings, “Growth in the food and beverage segment (accounting for ~50% of revenue) will mirror the overall sector’s performance. Some segments such as ice cream and beverages would see a steeper fall because of revenue loss for the major part of summer. 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.”

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.

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. 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. Hence, despite a sharp decline in revenues, operating profitability for the sample set is still expected to remain healthy at 18-19% in fiscal 2021 with marginal moderation of 70-100 bps. The sector has been one of the most resilient among consumer-oriented sectors in terms of credit quality.

Says Gautam Shahi, Director, Crisil Ratings, “Despite declining revenues, credit profiles of large¹ 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.”

The duration of the lockdown, progress and spread of monsoon and its impact on rural demand, will be monitorables in the road ahead.

¹ Large firms= revenue > Rs 500 crore, Small= revenue < Rs 500 crore