Fast moving consumer goods (FMCG) companies had a lackluster July-September quarter last year amid slowing urban demand. The hope was that things would improve in the third quarter with the festive season. However, the festive cheer seems to have been missing, with several companies pointing to continued weakness in urban demand, even as rural markets have continued to steadily recover.
"The demand conditions in India have been subdued for the past few months, which is evident in FMCG market growth," said homegrown Godrej Consumer Products.
Rival Dabur said its consolidated revenue is expected to register low-single-digit growth in the third quarter.
"During Q3, rural consumption for FMCG was resilient and continued to grow faster than urban," it said, adding that general trade had remained under pressure, while other channels like modern trade, e-commerce and quick commerce had continued to post strong growth.
FMCG companies are facing headwinds from several sides. One major reason for the slowdown has been high food inflation, which has pinched wallets, especially among low and middle-income families, thus hurting urban demand.
Rising input costs is another issue. Several companies have taken calibrated price hikes to offset some of this increase, but that also weighs on volumes. The price of palm oil, for instance, has risen sharply over the past year. It is a key ingredient in areas like soaps, while palm oil is also used widely in the food industry.
"The surge in palm oil and derivatives prices to the extent of a year-on-year increase of 20-30 per cent has impacted the soaps category, which represents one-third of our standalone business revenue," said Godrej Consumer.
The company has taken price increases, reduced grammage of key packs and reduced various trade schemes, which results in reduced inventory across wholesale and household pantry, it said.
Edible oil producer Marico took steep "price interventions" in Saffola Oils in response to the rise in vegetable oil prices. Firm copra prices have also hurt.
"The rising trend in input costs is expected to result in a higher-than-anticipated gross margin contraction on a year-on-year basis," said Marico.
The government, in September 2024, raised customs duty on crude and edible oils in a bid to reduce imports and support local production.
India has been among the largest importers of vegetable oil, and over half of the local demand is met by imports, with palm oil constituting a large part of it.
FMCG companies face dual stress—demand slump and inflationary pressure—noted Nitin Gupta of Emkay Global Financial Services.
"The demand slump has persisted in Q3, despite festive concentration. Inflationary stress asks for price hikes, which further affect demand. Expected respite from winter care offerings was also missing, given the delayed and weak winter," said Gupta.
He pointed out that FMCG sector valuations have seen sharp derating in the last three months, considering the muted demand setting and inflationary raw material backdrop, and he expects the earnings
downgrade cycle to continue during Q3, which will have a bearing on near-term stock performance.
Naveen Trivedi of Motilal Oswal Financial Services noted that pricing action in segments like personal wash due to high palm oil prices has been insufficient to offset inflation. At the same time, reduced grammage will affect volumes. Separately, he too pointed to muted winter demand in the quarter, which would have affected performance in segments like healthcare and skincare.
"For most companies, year-on-year volume growth is expected to decline in the third quarter versus the second quarter," said Trivedi.
He also expects weakness in gross margins for most companies and sees firms taking cost control measures as well as rationalising marketing spending to sustain EBITDA (earnings before interest, taxes, depreciation and amortisation) margins.
The BSE FMCG index has been down close to 10 per cent in the past three months, significantly underperforming the wider Sensex, which has declined 4.3 per cent in the same period, indicating a weak investor appetite for shares of consumer goods makers.
Shares of Hindustan Unilever, the largest FMCG company in the country, have been down over 14 per cent in the past three months. Godrej Consumer is down over 11.5 per cent, Dabur has shed 9.4 per cent, and Marico is down 8.5 per cent in the same period. Elsewhere, Emami has plunged 21 per cent, and Jyothy Labs has tumbled 26 per cent.
