FMCG Stocks Face Headwinds: Margin pressure and sluggish demand weigh on outlook

The fast-moving consumer goods (FMCG) and retail sectors are grappling with short-term headwinds as demand remains sluggish and profit margins shrink. Inflation, rising raw material costs, and higher product prices have dampened consumption, making it difficult for companies to sustain their revenue momentum. However, a stabilizing input cost environment and an increasing shift toward branded products in smaller cities provide some optimism for the sector.

Revenue growth remains steady, but profitability takes a hit

In the December quarter, the FMCG and retail space recorded a 13.6 per cent year-on-year revenue growth, continuing its upward trajectory for the fourth consecutive quarter. This was largely fueled by robust rural demand, which outpaced urban markets. Rural volume growth stood at 9.9 per cent, nearly twice the 5 per cent growth in urban areas, according to Anand Rathi Research. Despite this, the sector’s net profit growth decelerated to 7.5 per cent, marking the third straight quarter of declining profitability.

Profit margins have come under pressure as well. EBITDA margin shrank by 60 basis points to 15.6%, compared to the peak of 16.9% that was recorded in the quarter ending June 2024. Expanded marketing efforts, postponed winter sales, and consumer downgrading, particularly in oral care, biscuit, and paint, all contributed to lower margins.

Commodity price trends and macroeconomic factors shape industry outlook

The industry continues to battle inflationary pressures, particularly from key commodities like palm oil, tea, coffee, and edible oils. Analysts at JM Financial Institutional Securities suggest that global factors, including a potential Gaza ceasefire and Ukraine peace negotiations, alongside stable crude oil prices, could ease cost pressures. Any further cooling of commodity prices would be a much-needed boost for the sector.

Shift towards branded products and organized retail accelerates

Smaller cities and towns have emerged as a bright spot for FMCG firms. Axis Securities reports that tier-2 and tier-3 cities are experiencing faster growth than metros, particularly in apparel, quick-service restaurants (QSRs), and footwear. As disposable incomes rise, consumer preference is shifting towards branded goods and organized retail chains, which could drive long-term sectoral growth.

Performance and investment outlook of the stock market

In the last three months, the BSE FMCG Index has decreased by 9.6 per cent, which is in line with the 9.7 per cent benchmark decline of the BSE Sensex. Investor sentiment continues to remain negative due to feeble consumer spending and margin pressures. Still, some analysts argue that stock performance can improve over the coming quarters due to an expected gradual recovery in margins and better volume-led growth, particularly driven by demand from rural areas.

In the near term, companies with strong rural presence as well as good pricing power and cost management are expected to weather the storm more efficiently than their peers. Although there are challenges ahead, the long term growth trajectory of the sector remains assured especially if demand conditions normalize and inflationary pressures reduce.