FMCG Sector Loses Steam, but Outlook Brightens Amid Favourable Climate Predictions

The FMCG (Fast-Moving Consumer Goods) sector, which has been one of the poorest performers over the past 18 months, is poised for a revival, courtesy of favourable climate predictions.

According to data from stock exchanges, the return of Nifty FMCG, Nifty50, and Nifty500 indexes in the last year stands at 10%, 20%, and 27%, respectively. This indicates that the FMCG sector underperformed the broader Nifty500 market by a staggering 63%.

The decline was largely attributed to the severe drought-like conditions in July last year, which affected food grain production, disrupting the rural economy and leading to soaring inflation.

However, the climate forecast for the next two years is positive, with predicted bumper kharif production and neutral to positive La-Nina conditions. This has led experts to predict a 50% decline in food inflation, benefiting millions of urban consumers and paving the way for a surge in demand.

Agricultural department's data shows that after the good monsoon last year, food grain prices are expected to reduce significantly in the coming years. This is expected to boost rural demand, lead to lower input costs for FMCG players, and thereby increase margins.

"We expect volumes to be supported by the festive and marriage seasons in the short term, as well as an acceleration in central and state expenditures in the second half of FY25," said a sector expert.

The outlook is also encouraging on the valuation front. Despite below-par revenue and profit growth, industry heavyweights are now available at increasingly attractive valuations. As demand and profitability outlooks improve, experts expect valuations to rise sharply.

However, the sector must also contend with new disruptors in the form of ConsumerTech companies which use e-commerce platforms and innovative marketing models to launch products. While these start-ups have been successful so far, sustaining growth will become increasingly challenging as private equity funding becomes more competitive.

For now, though, investors are eagerly awaitng the second-half revival, triggered by favourable weather predictions, a surge in rural demand, and increased government expenditure. The FMCG sector is set to roar back to life.