FMCG index gains over 1% in weak market; HUL, Marico, Colgate rally upto 5%

The upcoming Union Budget is the near-term catalyst, where central government actions to revive consumption cycle would be key.

FMCG shares in focus: Shares of fast moving consumer goods (FMCG) were trading higher by up to 5 per cent on the bourses in an otherwise weak market on value buying and hopes of revival in consumption growth.

 

Colgate-Palmolive (India), Marico and Emami have rallied in the range of 4 per cent to 5 per cent. Hindustan Unilever (HUL), Godrej Consumer Products (GCPL), Nestle India, Britannia Industries, Dabur India, Tata Consumer Products and ITC were up between 1 per cent and 3 per cent.

 

At 12:40 PM, Nifty FMCG and BSE FMCG index were up 1.4 per cent, as compared to 0.6 per cent decline in the Nifty 50 and BSE Sensex. However, in the past one year, the FMCG index has underperformed the market by gaining 3 per cent, as against 9 per cent rise in the benchmark indices.

 

FMCG sector valuations have seen sharp derating in the last three months (~24 per cent derating from the peak; one-year forward P/E, ex-ITC, at 48x is under 10-year historical average forward P/E of 51x) factoring in the muted demand setting and inflationary raw material environment, according to analysts at Emkay Global Financial Services.

 

The upcoming Union Budget is the near-term catalyst, where central government actions to revive the consumption cycle would be key. Q3FY25 earnings are likely to disappoint with weak winter and pressure from raw material inflation, the brokerage firm said in a sector report.

 

The FMCG sector’s defensive nature is in question, given dwindling earnings growth, with dual stress of demand slump and inflationary pressure. Analysts see near-term sector outlook staying muted, on weak execution by companies and an unfavorable macro. With no visibility on any major positive catalyst, the brokerage firm said they see the street factoring in the pressure on numbers ahead which will keep valuations stressed.  Emami and Marico are likely to report relatively better earnings with mid-to-high single-digit growth, while remaining players would put up a muted show.

 

Meanwhile, according to Motilal Oswal Financial Services, soaring prices of commodities such as palm oil, coffee, cocoa and wheat forced FMCG players to go for a hike of 3 to 5 per cent or resort to shrinkflation by reducing pack sizes and grammage to retain attractive price points, fearing a volume loss.

 

“Demand trends in Q3 were quite similar to Q2, but we may see growth diversion in 3Q at the category/company level. Winter demand was muted, which would affect the performance of healthcare, skincare, OTC, HI, etc. High palm oil prices will affect multiple products, especially the personal wash portfolio, where pricing action is insufficient to offset inflation. Grammage reduction will also impact volume performance,” the brokerage firm said in the consumer sector update. Analysts said they continue to like HUL, GCPL, and Dabur (despite near-term soft earnings) as the brokerage firm does not see much downside risk and expect a better operating print in the coming quarters.

 

Meanwhile, the FMCG industry hopes for a revival in consumption growth in 2025 with some 'green shoots' already visible, after having a challenging year amid escalating input costs and a double-digit rise in food inflation, which ultimately slowed down the pace of the urban market growth in the second half of 2024. 

 

Soaring prices of commodities such as palm oil, coffee, cocoa and wheat forced FMCG players to go for a hike of 3 to 5 per cent or resort to shrinkflation by reducing pack sizes and grammage to retain attractive price points, fearing a volume loss.

 

The makers also expect a shot in the arm in the upcoming annual budget, which would help the stressed middle-income group and stimulate consumption, besides a good monsoon and continued rejuvenation of the rural market, the PTI reported last week.