A revival in rural demand and new product launches will push revenue growth in the fast moving consumer goods (FMCG) sector to 11-12% in 2018/19 from 8% in the previous year, leading to an improvement in credit profile and operating performance, says a new report by ratings agency CRISIL.

According to the report, disposable income and demand are expected to pick up following higher minimum support prices for crops, more non-agriculture employment, and expectation of a normal monsoon. Product launches and greater acceptance of Ayurvedic and herbal products will also benefit the sector.

Growth had recovered partially from the 5% range during FY16 and FY17—a period that saw sluggish rural demand resulting from a weak monsoon, intense competition and demonetisation. On the other hand, growth in revenue from the urban segment is expected to remain steady at 8%, the report added.

For FMCG firms, revenue growth will not be uniform, says the report. Mid-sized companies (revenues over Rs 250 crore) and larger firms (revenues over Rs 1,000 crore) will have an edge over smaller ones, as they have better operating efficiencies to cope with the goods and services tax regime.

“Given the prospects, we see large and mid-sized FMCG firms augmenting growth through two flanks: new launches and acquisitions,” said Anuj Sethi, senior director, CRISIL Ratings. “Small regional players with established brands are likely to be acquired by larger peers—even if such deals are expensive—to reduce time to market.”

Operating profitability of large and mid-sized FMCG firms is expected to stay at healthy double-digit levels. Rising costs and higher promotional spend will largely be offset by savings on logistics, transportation and from supply chain efficiencies, said the report.

On the credit front, the report expects the positive trend in credit ratio to continue.

“Going forward, we expect the positive trend in credit ratio to sustain for large and mid-sized firms driven by improving business profiles,” said Amit Bhave, director, CRISIL Ratings. “Also, healthy cash generation and prudent working capital management, along with deep pockets will allow for higher spend on acquisitions.”

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