Fast-Moving Consumer Goods Take A Slow Turn

Fast-Moving Consumer Goods Take A Slow Turn 

The FMCG sector, long favoured by investors for its defensive appeal during market downturns, is currently facing a series of challenges, including weakened demand, a slowdown in urban consumption, pricing pressures from rising costs, and the offloading of near-expiry or unsellable stock at deep discounts. Can the sector navigate these obstacles? Mandar Wagh examines the current market dynamics, evaluates the performance of industry leaders, and identifies both the headwinds and tailwinds shaping the sector’s future 

Even as the Indian markets grappled with sustained selling pressure from foreign institutional investors (FIIs) for various reasons, Donald Trump’s presidential election victory in the US intensified market volatility. After a notable uptick fuelled by festival optimism and auspicious buying during Diwali as well as a boost in IT stocks following a rally in US’ technology stocks, Indian benchmarks faced a sharp reversal. This decline came as US’ 10-year Treasury yields surged, the dollar index strengthened and the Indian rupee reached an all-time low. 

Rising yields, a robust dollar and an elevated dollar index negatively impacted emerging markets like India as they deter FIIs from investing in the country. A key factor behind the FII sell-off is a lack of investor optimism stemming from India Inc.’s disappointing Q2FY25 results. During the fortnights ending October 15 and October 31, FIIs withdrew significant investments from the oil and gas, construction and FMCG sectors due to broad weaknesses in these areas. Experts projected modest revenue growth of 5-7 per cent year-on-year for the September quarter. 

This would mark the slowest pace in the past 16 quarters. Meanwhile, the fast-moving consumer goods (FMCG) sector found itself back in the spotlight as retail inflation surged to a nine-month high in September, fuelled by escalating food prices. It has brought fresh challenges and raised questions about the sector’s resilience amidst rising costs. Let’s examine what lies ahead for the Indian FMCG industry by analysing the performance of industry leaders and gaining insights into key economic factors, sectoral headwinds and tailwinds to chart a future direction. 

Inflation and Interest Rates: The FMCG Squeeze
The US Federal Reserve has already implemented a 75 basis-point rate cut. In contrast, the Reserve Bank of India (RBI) has held back from cutting interest rates, mainly due to rising geopolitical tensions in the Middle East following Iran’s missile strike on Israel. This escalation threatens to disrupt oil supplies, and oil prices surged immediately after news of Iran’s military operation broke. Concerns are mounting that the conflict could escalate into a broader war, potentially driving up oil prices and limiting control over inflationary pressures. 

Additionally, consumer inflation in India jumped from 3.65 per cent in August to a nine-month high of 5.49 per cent in September, driven primarily by soaring food prices that present notable risks to stabilising the price environment. RBI Governor Shaktikanta Das indicated that the October CPI figure is likely to be very high, potentially exceeding the September CPI level. Recently, he added that while the central bank remains focused on supporting growth, any rate cut will only be considered once inflation shows signs of sustainably aligning closer to the RBI’s 4 per cent target. 

Consequently, there are growing concerns about a ‘higher for longer’ interest rate scenario in India, with the potential for prolonged elevated rates impacting various sectors. This would definitely not only create a dent in the purchase power of the people but also lead to an increase in prices of essential products. With the festival season now behind us, there are no immediate boosters in sight and therefore consumer goods may witness subdued growth. Let’s analyse the performance of leading FMCG players and how the factors of rising food prices and higher interest rates are impacting their businesses. 

FMCG Taste Test: Analysing Performance of FMCG Leaders
For an in-depth analysis of the sector’s overall performance, we have focused on companies listed in the Nifty FMCG index, providing a comprehensive view of the key contributors to India’s FMCG sector. In terms of aggregate performance, FMCG companies registered a moderate year-on-year increase in both revenue and profit, aligning with expectations, yet their quarter-on-quarter results fell significantly short. Year-on-year, the aggregate revenue grew by 8-9 per cent, with net profit showing a minimal increase of only 2 per cent. 



Click here to download Financial Performance of the Leading FMCG Companies

However, on a quarterly basis, the aggregate revenue saw a decline of 1-2 per cent, while the net profit tumbled by around 9 per cent. Higher food prices and elevated interest rates significantly affected India’s FMCG sector. As food prices rose, production costs for FMCG companies increased, particularly in the food and beverage segments. This squeezed the profit margins, forcing companies to either absorb these costs or pass them on to the consumers. Additionally, higher interest rates reduced the disposable income. 

Consumers faced increased borrowing costs and higher EMIs, leading to lower demand for discretionary FMCG products, especially premium and non-essential items. Consequently, FMCG companies experienced slower growth, reduced sales volumes, and greater pressure to maintain profitability in a challenging, cost-constrained environment. ITC, a leader in the FMCG sector with a diverse portfolio across food, personal care and cigarettes, delivered notable revenue growth primarily due to strong performance in its agriculture-related business and hotel segments. 

In contrast, its paperboards, cigarettes and other FMCG segments reported modest single-digit growth of only 2-5 per cent. Unlike other companies, only beverage companies demonstrated strong revenue performance on a year-on-year basis, which was fuelled by an extended summer season, intense heat waves, sustained demand, and successful new product launches. Effective marketing, promotional offers and expanded rural market reach also contributed to the growth. Varun Beverages, United Breweries and Radico Khaitan achieved notable double-digit year-on-year revenue growth. 

However, the sequential performance was weaker as the first quarter’s higher demand, typical of the summer season, tapered off in Q2. On the profitability front, most companies reported strong double-digit year-on-year net profit growth, primarily driven by a low base effect in Q2FY24. The profits saw a significant decline when compared to a stronger performance in the June quarter. Beverage companies were the main



contributors to this decline, and the overall performance was further weighed down by weaker results from sector leaders ITC and Hindustan Unilever, which affected the aggregate performance. 

FMCG stocks have been hit hard in the ongoing market downturn, with continuous FII sell-offs exacerbating the impact. Sluggish Q2FY25 performances by FMCG companies eroded investor confidence, leading to significant declines in share prices over the past month. This has pushed their six-month returns into modest or even negative territory. Despite the broader market challenges, beverage stocks have managed to maintain strong year-to-date (YTD) returns, thanks to robust rallies observed until September 2024. 

Navigating Cloudy Skies and Glimmers of Hope
Recently, the FMCG sector has been plagued with disappointing news. Reports have emerged suggesting that FMCG companies are using quick commerce and e-commerce platforms to offload near-expiry and unsellable stock, often by masking it with steep discounts. FMCG companies are also grappling with the dilemma of ‘mini packs’ as they reassess their entry price points of ₹5 and ₹10, weighed down by rising input costs and food inflation. To maintain competitiveness in the low-priced segment, many firms are considering reducing the gram weights of their products. 

This decision comes in response to significant price hikes in commodity inputs like palm oil, coffee and cocoa, which have surged sharply over the past year. On the other hand, middleclass consumers are facing mounting concerns about their budgets as FMCG companies implement price hikes to offset rising commodity inflation. Following Diwali, several major FMCG players, including HUL, Marico, Tata Consumer Products and Dabur, have already raised prices, with more hikes expected in the near future. 

Despite the slowdown in urban consumption, it is noteworthy that rural areas have experienced growth at twice the pace of urban regions. While urban areas saw a modest growth of 2.8 per cent, rural areas registered a more robust 6 per cent growth. This performance is impressive, considering the challenges in the urban markets, yet it highlights the strength and resilience of rural demand, even though it hasn’t been enough to fully counterbalance the urban downturn. The growth in rural demand can be attributed to the expanding reach of e-commerce and quick commerce platforms. 

This has allowed the FMCG companies to tap into a larger customer base, particularly in Tier II and III cities. This trend is expected to continue, providing a strong tailwind for the FMCG sector. Furthermore, the government’s focus on rural development, combined with rising disposable incomes, is further driving consumption, offering a favourable outlook for FMCG companies targeting these regions. The increasing shift towards health-conscious and premium products is also fostering innovation and opening up new market opportunities. Experts are forecasting much stronger results for Q3FY25, driven by increased sales volumes during the festival season, stretching from October to December. 

However, concerns may persist on the margin front, as challenges related to rising costs and inflation could continue to pressure profitability. Controlling inflation within the RBI’s targeted range has now become essential for all stakeholders – the government, FMCG companies and consumers alike. The upcoming government, following the assembly elections in Maharashtra, could potentially make key announcements aimed at addressing the concerns of farmers, low-income and the middle-class, particularly regarding food prices and inflation. The inflation figures for October, along with the RBI’s future stance on interest rate cuts, will play a pivotal role in shaping the outlook for the FMCG sector. 

Investor Strategy in Uncertain Times
In the short term, foreign institutional investors (FIIs) are unlikely to return to the Indian markets, given the weak Q2 earnings, slow economic growth and rising inflation. Meanwhile, favourable factors in other economies, such as Donald Trump’s election win, a strengthening dollar, a rising dollar index and China’s stimulus efforts, are drawing FIIs abroad. Despite the current market downturn, investors should avoid panic and also refrain from heavily investing in falling stocks, as the market’s bottom remains uncertain. 

We recommend avoiding short-term investments in FMCG stocks due to ongoing sectoral challenges. Investors who are already positioned for the long term need not worry, while those considering new investments may benefit from waiting until conditions improve with more controlled inflation, stable sales volume, revenue growth and better profit margins. Focusing on FMCG companies with strong rural engagement may also be prudent, as rural demand continues to support the sector during challenging times.