FMCG index hits 21-month low; HUL, Marico, Nestle, Dabur down up to 3%

FMCG stocks: In the past one month, the BSE FMCG index has tanked 12 per cent as compared to 7 per cent decline in the BSE Sensex

Shares of fast-moving consumer goods (FMCG) companies were under pressure on Tuesday, with the BSE FMCG index hitting a 21-month low in intraday trade due to demand and inflationary stress. Urban demand trends remain tepid, and recovery is likely to be gradual, aided by peaked-out inflation and expected benefits from income-tax rate cuts, according to analysts.

 

The BSE FMCG index was down 1 per cent to 18,196.88 — its lowest level since June 2023, when it had hit a low of 18,111.2 during the month. The FMCG index ended 0.4 per cent lower at 18,317.32, compared to a 0.13 per cent decline in the BSE Sensex.

 

In the past month, the BSE FMCG index has tanked 12 per cent, compared to a 7 per cent decline in the BSE Sensex. Over the past six months, the index has plunged 21 per cent, against an 11 per cent fall in the benchmark index.

 

Hindustan Unilever (HUL), Dabur India, Nestlé India, Britannia Industries, Marico, Colgate-Palmolive (India), and Godrej Consumer Products slipped between 1 per cent and 2 per cent on the BSE on Thursday. Over the past six months, these stocks have tumbled up to 35 per cent.

 

Valuations for FMCG companies have been derated due to earnings pressure caused by demand stress and inflation. Urban demand growth remains slow due to higher unemployment and sluggish real wage growth, while rural India has bounced back following government interventions and normal monsoons last year. 

 

The FMCG sector registered yet another muted performance in the 2024-25 (FY25) October-December quarter (Q3), with mid-single-digit revenue growth affected by lower volume growth of 2-4 per cent. This was driven by urban volume growth moderating for a third consecutive quarter, while rural demand saw a gradual recovery. Higher raw material inflation and competitive pressure resulted in a decline in the earnings before interest, tax, depreciation, and amortisation (Ebitda) margin by 50-350 basis points year-on-year for most consumer goods companies, ICICI Securities said.

 

The sudden surge in palm oil prices in Q3FY25 surprised FMCG players, with the hike exacerbated by fresh duty imposition by the government to safeguard domestic oil production. With limited hedging in place, FMCG companies have seen sharp margin erosion in Q3FY25.

 

“In our FMCG universe, Bikaji, Britannia, and Godrej Consumer are logging a high-margin base, which is likely to keep earnings under pressure. However, the margin base is expected to normalise from the first quarter of 2025-26 (FY26). As players have begun implementing price hikes to pass on the cost burden to consumers, we expect sequential improvement in the margin profile,” analysts at Emkay Global Financial Services said in a sector update report.

 

Barring a few companies like HUL, Nestlé, and Britannia (which managed with lower advertising and promotion spending), Ebitda margin pressure was significant for most coverage companies. Looking ahead, the brokerage firm said Ebitda margin pressure is expected to persist due to gross margin stress and the need for higher advertisement spending. Unlike Q3, which saw a cutback on advertising expenses, analysts anticipate that expectations of demand improvement from the tax stimulus for FY26 will push FMCG players to ramp up their ad spending.

 

Factoring in demand and inflationary stress, valuations of most FMCG coverage companies have mean-reverted. For some players like HUL and Nestlé India, valuations are now below the -1SD five-year average forward price-to-earnings. While valuations are more attractive than historical levels, the brokerage firm sees earnings improvement as key to any rerating. If earnings pressure continues, analysts expect further derating for FMCG companies.