While globally, FMCG/ consumer non-discretionary sectors are viewed as defensive plays, in India, for over a decade, they also served as aggressive growth bets. Why not, when GDP was growing consistently in mid- to high-single digits pulling up millions of people out of poverty and pushing them into the consumption class! On top of this, a rising affluent middle-class drove increased demand. The theme played out so well between 2010 and 2019 with Nifty FMCG index delivering 263 per cent, significantly outperforming Nifty 50 which delivered 128 per cent. HUL and Nestle India were bumper hits during this period, returning 515 per cent and 288 per cent respectively.
But the last five years tell a totally different story with Nifty FMCG index returning just 95 per cent, while Nifty 50 zoomed 159 per cent. Industry leaders like HUL and Nestle India even underperformed the sectoral index, returning a meagre 0.5 per cent and 34.5 per cent during the same period.
However, post this underperformance, and amid global trade-war driven uncertainties, views now are again emerging in favour of FMCG stocks. But has there been a fair reset in the valuation? What’s weighing on the sector, how are companies responding and what does it all mean for long-term investors? Here is a lowdown.
Consumption blues
Almost the entire FMCG pack forecasted a double-digit volume growth for FY25, at least from H2 FY25, with a gradual recovery in rural, while urban continues its growth trajectory. But what actually played out has been starkly different. While rural markets, which were a drag post Covid, recovered from Q4 FY24, urban markets which carried the mantle until FY24 are underperforming now.
After many seasons of erratic monsoon post-Covid, 9M FY25 saw green shoots with better agricultural output. With the advance estimates of wheat production signalling a strong harvest and the current market prices at a premium to the minimum support price, the recovery in the rural markets seems set to continue into FY26.
However, urban markets are seeing premiumisation as a key trend with mass-market products, which drive the bulk of FMCG business, underperforming. And interestingly, many companies saw small packs flying off the shelves faster in Q3 FY25, which could be a sign of distress.
An alternate line of thought gaining ground is that while a slowdown is observed in the growth trajectory of the listed giants, it is not entirely a result of cyclical economic slowdown and inflation in recent years. Corroboration comes from digital-first direct-to-consumer (D2C) brands, with the right formulations, continuing to grow exponentially (albeit on a low base), despite being skewed towards the urban premium.
There is an inevitable structural shift taking place in the distribution channels and the go-to-market strategies. So, slowdown apart, changing dynamics, including D2C players gaining market share, also need to be factored while considering investments in the sector.
Distribution conundrum
There were times when players in the industry could flex their muscles stating their huge network of distributors and kirana store retailers.
But disruption has come via quick commerce (q-commerce). Though e-commerce was already in the fray, the real disruption was brought about by q-commerce, being the real alternative to the kirana stores, meeting your last-minute needs.
With the urban distribution channels disrupted by q-commerce, the companies have started consolidating their urban outreach, focusing on ‘high-potential outlets’, while continuing to expand their rural outreach. Companies are now even tailoring SKUs by channel to spur growth.
HUL, on the other hand, in a bid to strengthen general trade, has initiated a direct-to-kirana distribution strategy in Mumbai aimed at faster and reliable deliveries helping retailers avoid large inventory holdings.
While general trade still contributes more than half of the sector’s revenue currently, modern trade channels (including online channels) are leading the growth with healthy double-digit, year-on-year gains.
Q-commerce has diluted the significance of a distribution network. Minimal investments in distribution networks meant that the focus could be channelled towards new product development and promotions. A rising quality-consciousness among consumers further levelled the field and D2C brands, with the right formulation and a focus on ingredient composition, have managed to score big. Earning brand loyalty, consequently, is more difficult now than it ever has been. This is where the sector giants are facing competition from emerging players.
In the earlier structure, emerging brands were stonewalled by the distribution network, but now they can compete better. And the D2C/emerging brands have turned out to be the quiet, industrious ants to the elephant-esque legacy players.
To address some of the challenges here, the industry giants have warmed up to acquisitions. With healthy cash generation every year, the M&A playbook has always been integral to the incumbents. Acquiring emerging D2C brands, apart from adding to the product portfolio, has also helped expand their digital presence.
HUL, looking to expand its offerings under the beauty and wellbeing (B&WB) segment, bought out The Minimalist in Q3 FY25. Emami, meanwhile, acquired The Man Company and Brillare Sciences, operating in the same B&WB segment. Marico, too, acquired four D2C companies – Beardo, True Elements, Just Herbs and Plix.
However, these acquisitions were, more often than not, worked out at steep valuations and do not materially add to the acquirers’ topline immediately. For example, HUL’s acquisition of The Minimalist was valued at an expensive 8.5 times its FY24 revenue of ₹347 crore. But it only adds around 0.6 per cent to HUL’s FY25 revenue.
The scale-up pace will be a key monitorable here.
Momentum check
The recent financial performance of players, part of the FMCG index and also under our coverage, validate the evolving demand trends and shifts in margin dynamics across the sector.
Food & Beverage
Both Britannia and Nestle India undertook price hikes to protect their margins on account of sustained inflation in input costs. But having been late to pass on the rising input prices, despite the volume growth of around 6-8 per cent year on year during 9M FY25, Britannia’s revenue grew just 4.6 per cent. Though marginally better than FY24’s 3.5 per cent and FY20’s 4.3 per cent, it is the slowest since FY03. EBITDA margin was down 100 basis points (bps). Nestle India, similarly, found its EBITDA margin down 59 bps, while revenue grew just 3 per cent (its lowest since FY16), resulting in EBITDA being flat.
Home & Personal Care
Improved product mix helped Emami, Jyothy Labs and Godrej Consumer Products (GCPL) with their profit margins. The growth and increased penetration in high-margin liquid detergents also helped Jyothy Labs and GCPL with their profitability.
Consequently, Jyothy Labs and GCPL saw their EBITDA margin improve 10 bps and 40 bps year on year during 9M FY25. Emami, with improved offtake in its high-margin antiseptic cream and gels, saw its EBITDA and PAT margins expand 50 bps and 110 bps during 9M FY25.
Home and Personal care segment continued to be the largest and fastest growing segment for HUL and Dabur.
HUL’s EBITDA margins were down 21 bps for FY25, while that of Marico and Dabur also dropped 70 bps and 74 bps during 9M FY25, owing to inflation in prices of palm oil, copra and fruit concentrates respectively, their key raw materials.
Outlook
In macro terms, the urban-rural gap in monthly per capita consumption expenditure is down to 70 per cent in 2023-24 from 84 per cent in 2011-12, signalling steady rural consumption growth. For the urban markets, a rise in disposable income, thanks to tax cuts and panel for the eighth pay commission (expected to come into effect from H2 FY26) to be appointed in the next two-three months, alongside a softening inflation is theoretically a positive set-up.
Softening raw material prices, particularly copra and palm oil, should help improve profitability going ahead. Also, price hike measures still underway, continuing until Q1 FY26, hints at price growth for FY26. But sustained increase in advertising and promotion expenses, to drive volume growth, will continue, limiting the expansion in profit margins. The focus continues to be on volume-driven growth and demand environment is expected to improve starting from Q2 FY26.
The industry will continue to grow, but the pace at which it comes is the million-dollar-question. For the near term, changing dynamics in the distribution channels might have an impact, but in the long term, premiumisation is expected to continue being the driving factor with a focus on the product portfolio. Under-penetrated categories such as body wash liquids, functional nutritional drinks, household insecticides, oral care and hair care products could drive faster growth for Emami, Jyothy Labs, GCPL and Marico.
Valuation
The Nifty FMCG index has corrected from a peak PE of 52.8 times in January 2024 to 44.3 times now. But it is still at a premium to its five-year average of 42.6 times. The pre-Covid five-year average PE is at a much lower 40.2 times, signalling that the correction might be underdone.
At the start of 2010, the Nifty FMCG index was valued at 30 times its earnings. The decade that followed (2010-19) saw earnings grow at a 13.6 per cent CAGR, while the index grew at a significantly higher CAGR of 17.1 per cent, stretching the valuation to 40 times its earnings, as at the end of 2019. While a burgeoning middle-income group drove business and earnings growth, the valuation re-rating was driven by low global interest rates and liquidity gush. Besides, investor confidence in consistency of earnings growth with most companies in the sector regarded as quality stocks, backed by a strong track record of execution and sound corporate governance added fuel. Also, the capex cycle taking a hit due to the bank clean-up during the decade meant that consumer non-discretionary plays were relatively better bets.
But now some of the above factors have taken a hit. Recent years have shown that volume and earnings growth may not be consistent, and global liquidity has significantly tightened. Zero or ultra-low interest rates in developed markets meant that an FMCG stock priced at 75 times its earnings could even be attractive for a foreign investor. This is not the case anymore, with risk-free government bonds in developed markets giving attractive yields relative to high-PE FMCG stocks. So the levers for premium valuation are waning.
HUL, at 48.8 times its FY26 earnings, despite its market leadership and a discount to its five-year average, might see further deterioration with cut in margin guidance by 100 bps to 22-23 per cent for FY26. Its average volume growth from FY20 stands at 3 per cent, half that of the 7 per cent growth recorded during FY11-19. Dabur, with challenges in pushing sales through general trade might also see a difficult FY26, and trading at around 42 times its FY26 earnings, margin to safety seems minimal.
Nestle India continues to be the most expensive, trading at 68.7 times. Marico, trading at 50.6 times its FY26 earnings, is still at a 14 per cent premium to its five-year average, leaving little room to err. Similarly, Britannia is trading at an 11 per cent premium to its five-year average and GCPL at a premium of 19 per cent.
Emami and Jyothy Labs are relatively cheaper, trading at 29 times and 31.8 times their FY26 earnings respectively. Per our recent recommendations, investors can consider accumulating in these counters.
High valuation multiples always work against share appreciation unless growth is consistent. All hinges on volume growth recovery for the industry. And at this juncture, valuation is the most critical factor for investors to find investment opportunities in this sector. Hence, tempered expectations and selective stock-picking should be the way to go.
Published on April 26, 2025