FMCG: Investors should wait for correct valuations or demand to recover

Ongoing weakness in urban consumption may continue, weighing down value and volume growth of FMCG players in the ongoing January-March quarter (Q4) of FY25 and first half of FY26

The BSE FMCG index has underperformed the benchmark Sensex, by declining 10 per cent since February 1 – the Sensex has dropped 2 per cent during the same time. Fast-moving consumer goods (FMCG) majors may continue to be under pressure on weak demand and high inflation trends. 

 

Ongoing weakness in urban consumption may continue, weighing down the value and volume growth of FMCG players in the ongoing January-March quarter (Q4) of FY25 and the first half of FY26.

 

Rural growth is stable, but not accelerating and will continue to contribute around one-third of FMCG industry sales. Inflation in palm oil, tea, and coffee may draw down margins. Nestle, Tata Consumers, and Hindustan Unilever (HUL) may thus see some pressure. Higher palm oil prices may impact soap players like HUL and Godrej Consumer Products (GCPL).

 

In the October-December quarter (Q3) of FY25, FMCG players posted a sluggish performance due to weak urban demand, lower uptake in the winter portfolio, and high palm oil prices.

 

While traditional channels were sluggish, emerging channels continued to drive growth. Inventory pressure eased, and secondary growth was marginally higher than primary growth. Rising agri basket costs (tea, wheat, palm oil, and edible oils) led to gross margin contraction, and earnings before interest, taxes, depreciation, and amortization (Ebitda) margin also declined.

 

Demand trends may improve gradually, due to income tax benefits to individuals, interest rate cuts, macro recovery. Volume growth remained in low-to mid-single digits.

 

FMCG companies are focusing on distribution expansion, product innovation, and consumer incentives. In terms of revenue, Marico (up 15 per cent) and Procter & Gamble (up 10 per cent) were outliers, and Ebitda performance was better for P&G (up 20 per cent). Most categories saw mid-single-digit growth. Dairy and oral care (both up 8 per cent) did best while personal care (flat), and hair care (up 1 per cent) struggled. 

 

Inflation trends indicate stabilisation or correction in the majority of commodities may be around the corner but year-on-year (YoY) inflation is quite high while longer trends may stabilise at 5 per cent per annum. Palm oil has been trading at premium due to supply disruptions in Indonesia and Malaysia, due to floods. Malaysian Palm oil prices are up 17.5 per cent YoY in Q4FY25. Palm Fatty Acid is up 45 per cent YoY. Soyabean Refined Mumbai prices are up 41 per cent YoY. The USD continues to be strong. Wheat prices are up 18 per cent YoY but may ease due to bumper crop. Sugar prices have risen (up 5.9 per cent YoY) owing to lower production. The India WPI Coffee index is up 32.3 per cent quarter-on-quarter (QoQ) and cocoa is up 78 per cent YoY but corrected 16 per cent month-on-month (MoM) in March’25.

 

HUL distributors indicated a recovery in the nutrition portfolio and detergent offtake is good, while demand in beauty & personal care is under pressure. ITC’s performance in the cigarette business was sustained and food was resilient.

 

Nestle’s trade channel indicated traction in chocolates, instant noodles, and beverages while milk and nutrition are under pressure.

 

GCPL may see offtake improve due to a price cut, scale-up of RNF-based incense sticks, and higher retail margins. Dabur’s winter portfolio was weak. Colgate has been aggressive on schemes to drive offtake post price hikes.

 

Marico is expected to witness buoyancy in food. Britannia distributors may have missed targets during February 2025. Biscuits were key growth drivers while cakes declined. Distributor stock holdings increased to 7–10 days in February.

 

Assuming continued weakness in consumption in the first half of FY26, analysts may trim earnings estimates in most categories. Investors should wait for valuations to correct or signs of recovery in urban consumption before the sector becomes attractive.