Weak rural demand to dent FMCG sector volumes in Q3FY24, says Nuvama; United Breweries, Nestle to be outliers

In its report on the Consumer Staples sector update, domestic brokerage house Nuvama Institutional Equities stated that rural demand would continue to be difficult in Q3FY24, which could hinder the volume growth of the fast moving consumer goods (FMCG) industry. Rural volumes will trail urban volumes and are expected to remain flat or experience a slight decline year over year (YoY).

Rural stress is reflected in the high rate of unemployment and the demand for NREGS. Value sales will also be muted because categories are deflating as a result of higher gross margins. For most players, the brokerage anticipates growth in gross margins year over year. Spending on advertising will probably increase as margins rise.

Winter and festival demand in Q3FY24 were likewise less strong than most players had anticipated. According to the brokerage, most players' Q4FY24 volumes will likely stay muted. As a result, they anticipate a gradual recovery in FY25. "Upcoming general elections and a further reduction in inflation are likely to lead to a gradual improvement in FY25.

However, we estimate Q3FY24 and Q4FY24 to stay challenging for the sector in terms of volume growth. We expect United Breweries and Nestle to do well in the December quarter in terms of sales and volume growth," the brokerage said. According to the brokerage's report, the management of multiple FMCG companies noted that while demand in urban areas was still increasing, demand in rural areas was still facing difficulties due to low incomes.

The FMCG sector has grown less aggressively this year as a result of a combination of factors including inflation related weak demand sentiment, particularly in rural areas, increased aggression from smaller players, and alternative spending avenues. The slowdown in rural areas and the rise of local players attenuated overall demand trends.

Urban areas have continued to grow faster than their rural counterparts. With the deflation of essential raw materials, most players' gross margins increased year over year. Prior to the COVID 19 pandemic, rural markets were double as fast as urban markets in terms of overall growth. But over the last few quarters, demand has decreased.

Earlier, consumer goods companies anticipated that the December quarter would see a recovery in demand. The consumption slowdown has persisted in the current quarter as well, despite the fact that it has not materialised. While rural markets in India have experienced only slight growth this year, the FMCG industry's volume growth in urban areas has been steadily increasing since April to June of last year, said Nuvama in its report.

Livemint tops charts as the fastest growing news website in the world to know more. Unlock a world of Benefits! From insightful newsletters to real time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away!.