Nifty FMCG hits all-time high for 4th straight session, gains 16.5% in 3 months; what’s fueling the surge?

The Nifty FMCG index hit a new all-time high on Tuesday, August 27, crossing the 63,800 mark to reach a peak of 63,805 points, approaching the 64,000 level. This milestone marks the index's fourth consecutive day of setting new records.

Despite reaching a new high, the index ended the session with a decline of 1.06%. However, it still contributes to a positive trend for August, which shows a 1.15% increase. Over the past three months, including the current month, the index has shown a strong upward trajectory. This growth has been supported by improving rural demand and favourable June quarter results from major FMCG companies, driven by healthy performance in their summer portfolios.

Additional factors contributing to the index's higher levels include a decline in raw material prices, government initiatives to boost rural consumption through increased funding for various schemes, and the anticipation of a healthy monsoon. These elements have collectively driven the index up by 16.5% during this period.

FMCG companies covered by Motilal Oswal Financial Services (MOFSL) reported 6% year-on-year (YoY) revenue growth for the June 2024 quarter, up from 4% in the March quarter, indicating a positive consumption trend. However, the brokerage noted that while companies are focusing on marketing and distribution, EBITDA margin expansion has been slower compared to gross margin increases. A price hike is anticipated in H2FY25 to counter rising raw material costs.

Major FMCG players such as HUL, ITC, Dabur, Britannia, Nestle, and Emami have reported promising developments in rural markets and significant growth from e-commerce channels, particularly quick-commerce platforms, in their June quarter earnings.

Rural economy emerging as a key driver of the FMCG sector's revival

Although India's economy is expanding rapidly, it is not evenly distributed. Rural areas, in particular, have lagged behind overall economic growth. The pandemic exacerbated this disparity, with rural demand suffering significant setbacks, compounded by adverse weather conditions.

However, recent data, including a rebound in two-wheeler sales and a slight uptick in FMCG volumes, suggests a revival in rural demand. Increasing incomes, improved infrastructure, and growing rural savings have significantly contributed to volume growth in FMCG products, with the industry reporting around 6.6% volume growth in the June 2024 quarter, according to the Reserve Bank of India (RBI).

To capitalise on this rural demand, FMCG companies are expanding their direct distribution networks and introducing smaller pack sizes to cater to rural consumers. According to the analysts, FMCG companies are implementing strategies such as rural-specific promotions during local festivals, door-to-door campaigns with free samples and trial packs and buy-one-get-one (BOGO) offers to boost sales in these areas.

Hindustan Unilever (HUL), the largest FMCG company in the country, derives about 30-40% of its sales from rural regions and is focusing on mass-market segments like skincare, soaps, detergents, and tea to strengthen its presence in these growing markets.

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