Higher volumes, margins potential rerating triggers for FMCG companies

The fast moving consumer goods (FMCG) sector is looking at volume growth and better margins from the second quarter of the ongoing financial year 2026 (Q2FY26).

 

FMCG companies are seeing structural growth since categories like shampoos and detergents are under-penetrated. Consumers are also opting for premiumisation, which is a key driver. Rural growth has sustained and a good monsoon may lead to acceleration in demand.

 

Some raw materials are also seeing moderating inflation. Grain prices are almost unchanged though wheat is slightly up. Coffee, cocoa, and tea prices have softened by high single digits, or double digits on a year-on-year (Y-o-Y) basis. However, edible oils are inflationary, with palm oil up 12 per cent Y-o-Y (up 4 per cent quarter-on-quarter or Q-o-Q) and copra prices have surged 29 per cent Q-o-Q. This is a concern for Marico. Crude is stable though geopolitical risks could push up plastic packaging and logistics costs. Soybean, sunflower, and mustard oil saw Q-o-Q upticks.

 

Nielsen data says the FMCG sector in aggregate grew 13.9 per cent Y-o-Y in value in Q1FY26, after being up 10.7 per cent Y-o-Y in Q4FY25.

 

Volumes grew 6 per cent Y-o-Y in Q1FY26 (vs. 5.1 per cent Y-o-Y in Q4FY25), while pricing growth was 7.4 per cent in Q1FY26 (vs. 5.6 per cent in Q4FY25). The market has been able to sustain hikes.

 

Unit sales outpaced volume growth, indicating a shift toward small packs. Rural markets beat urban for the sixth straight quarter, with 8.4 per cent volume growth, versus urban growth of 4.6 per cent. Smaller towns showed signs of sequential recovery.

 

Management commentary is optimistic with a good monsoon, and hopes of lower GST.

 

Most FMCG managements are upbeat about volume growth in Q2 and the second half of (H2FY26). The good monsoon raises hope of strong agriculture performances and consequently, higher rural incomes going into festive season.

 

If GST cuts in food & staples do happen, that could boost consumption. A simplified structure may push FMCG products in the 12 per cent bracket (butter, ghee, cheese, juices, ketchup, jams, noodles, chips, masalas, etc.) to 5 per cent. Some products in the 18 per cent bracket may also move down to 5 per cent.  

 

The e-commerce segment continues to grow. Southern metros had a higher e-com share at 18.4 per cent of e-com versus 15.8 per cent share in all eight metros in Q1FY26. Nielsen highlighted that while e-com accounts for 11-13 per cent share in metros by value, growth rates are one-and-a-half times that of omni-channel.

 

Some FMCG majors cut back on advertising & promotional (A&P) spends in Q1FY26 in the face of margin pressures. Given intense competition, A&P spends may revive as gross margin pressures ease.

 

Post Q1, Hindustan Unilever (HUL) said it expects better gross margins and improvements will be reinvested into growth. Dabur’s domestic and international markets improved sequentially. The company reported market-share gains across 95 per cent of its portfolio and it has guided for high single-digit revenue growth for FY26 with double-digit growth in Q2FY26 and Ebitda margin improvement.

 

Godrej Consumer Products expects volume growth in mid-teens, except in the underperforming soap portfolio.

 

It has gained share in insecticides and expects Q-o-Q improvement through FY26 with H2 seeing better margins. It has guided for high single-digit consolidated rupee revenue growth and double-digit consolidated Ebitda growth for the financial year.

 

Marico saw premium categories outselling, while modern trade, e-com and quick-com led growth. Supported by price hikes, it will target 25 per cent revenue growth but inflation in copra and palm oil may retard margins. Tata Consumer Products saw core businesses, tea and salt, grow double-digits in value, and also up in volume. The e-com and quick-commerce segments grew by a combined 61 per cent, while modern trade grew 21 per cent in Q1. Tea prices are down as are coffee, and management expects a 34-37 per cent gross margin range.

 

Britannia saw double-digit rural growth and high single-digit urban growth. Volumes grew 2 per cent, with revenue outpacing volume due to price hikes. Margins are expanding with stable raw material prices.

 

FMCG stocks have gained in the last six months. Most have excellent balance sheets and good return ratios as well as being stable dividend payers. Volume growth with sustained margins could trigger re-ratings.