JPMorgan India Investor Summit: Easing Prices To Drive FMCG Volume Growth, Says Latika Chopra

Reduced prices and a recovery in rural sales can spur volumes in the fast-moving consumer goods industry, according to JPMorgan Chase and Co.'s Latika Chopra.

Rural volume in the FMCG sector marked a turnaround in the June quarter after the continuous decline over the past few quarters, the executive director at JPMorgan India said. 

"We still feel that things are (a) little uncertain, but nevertheless, we are hoping that this little improvement gradually strengthens as we go into the coming quarters," she told BQ Prime on the sidelines of the JPMorgan India Investor Summit. "And what is going to drive this, in our view, is going to be moderating pricing for consumer goods."

Companies have been proactively reducing prices in categories like soaps, laundry, shampoos, and edible oils. And in other categories, companies have stopped raising prices. This should spur volume growth to recover, aided by more aggressive advertisements and promotions, according to Chopra.

She expects leading companies that were clocking flat or low-single-digit volume growth to gravitate to mid-single-digit levels in the second half of the current financial year.

After the gross margins took a hit in the last fiscal, they are improving sequentially across all companies in the sector, Chopra said. Many companies are faring better than expected after starting to use their low-cost inventories, she said.

Even though all the gains are being reinvested towards higher brand expenditure and marketing, the Ebitda margins are heading in the right direction, Chopra said. Although margins haven't gone back to pre-pandemic levels, she expects this recovery to come through in the next fiscal.

However, one needs to keep an eye on the rising commodity prices even though the FMCG companies are in a comfortable position right now and enjoy the benefit of low commodity costs in the short term, she said.

Crude prices play an important factor, and if they continue to flare up, companies would have to rethink pricing policies a few months down the line, Chopra said.

Chopra expects a slow and gradual recovery for rural volumes.

While historical data shows no material correlation between monsoon and FMCG volume growth data, the uneven monsoon has emerged as a risk, she said. However, when one looks at the company narratives and rural data uptick, moderating inflation is helping, according to Chopra.

The state governments' spending during the election year is another factor that needs to be paid attention to, as it would be positive in terms of consumption, she said.

Demand for urban staples fared much better, and its resilience seemed to be holding out, she said. However, categories like fashion, quick-service restaurants, and durables have been impacted by inflation, she said.

The December quarter would be key for urban discretionary demand, hoping that the festive season would support the growth, Chopra said.

She highlighted how the paint and organised jewellery sectors showed fairly high growth rates. Despite the volatility due to the uneven monsoon, the festive season and the recovery in the real estate sector would help the segments perform better this year.

The companies belonging to the consumer staples pack are in line with historical averages, Chopra said. The quantum of earnings downgrades induced in the sector was seen coming to an end last quarter, and this would help support valuations, she said.

For the consumer discretionary pack, the trend is similar. While valuations are not necessarily cheap, they have come below the earlier levels.

Chopra's call for the near term is to prefer staples over discretionary.