The fast-moving consumer goods (FMCG) industry posted lackluster numbers in the December quarter amid macroeconomic headwinds in the West and also a slowdown in urban demand. However, with domestic revival at play and consumption growth, Centrum Institutional Research stated, the sector is likely to see a boost in the coming months. Per the report by the brokerage firm, the sector is expected to witness a boost, especially from a recovery in rural demand. Rural inflation, meanwhile, is also witnessing a downward trend along with a gradual rise in real wages in rural areas.
In Q3, the FMCG sector grew by 10.6 per cent YoY in value terms from 5.7 per cent YoY in the previous quarter and the volume growth surged to 7.1 per cent on-year. During the third quarter of the fiscal year, an analysis report by Anand Rathi said, rural growth outpaced urban, by 2x, with rural volumes rising 9.9 per cent vs 5 per cent in urban markets. Most companies are seeing stronger traction in rural regions, while urban demand in Q3 remained muted. According to Nielsen data, however, there has been signs of urban demand reviving as well.
Elara Capital said that in the past two quarters, FMCG sales have been subdued even as rural demand has witnessed a gradual recovery. “Delayed growth recovery, the slowdown in urban demand and higher prices of a few commodities have pushed FMCG stocks 10-35 per cent in the last 5-6 months. Thus, valuations of many of these companies have turned attractive at sub-40x FY27e EPS,” the brokerage firm said.
Sector management commentaries projected a brighter outlook, with high revenue, led by rural demand recovery, expanding distribution and pricing growth for most consumer companies.
Snapshots from Q3 earnings reports
In Q3, FMCG major ITC had posted a profit decline of 7.51 per cent YoY to Rs 4,935 crore. The company had, however, pointed to early signs of recovery in urban markets even as rural markets continued to witness a growth momentum. “With improving agri terms-of-trade, healthy kharif output, and improvement in rabi sowing, rural consumption is expected to build on the gradual recovery momentum witnessed in recent months; there are incipient signs of recovery in urban demand as well,” it had said.
Marico had reported a 4.2 per cent YoY increase in net profit to Rs 399 crore for the October-December quarter. The company had maintained that it expects demand to remain stable in the coming quarters, supported by rural recovery and government measures.
Dabur India had posted a profit of Rs 515.82 crore during Q3, reporting a marginal growth of 1.85 per cent YoY. The company had attributed the growth to a strong resurgence in rural markets. During the fiscal, it also expanded its rural distribution network by 15,000 villages and reached over 131,000 villages.
Nestlé India had reported a profit of Rs 688.01 crore during the third quarter of FY25, up 4.94 per cent YoY. While maintaining that the company delivered growth despite the challenging external environment, CMD Suresh Narayanan acknowledged the role of recovery in rural consumption in driving growth.
How is the Indian economy doing?
The Indian economy is performing better than what the earlier data for FY23 and FY24 suggested with GDP growth for the fiscal third quarter being reasonably good at 6.2 per cent (on a high base of 9.5 per cent). However, the growth has lost considerable momentum and is expected to grow much below its potential in the current year and probably next year too. The slowdown will also be due to tariff announcements by the Donald Trump-led US administration.
A Crisil report had maintained that India’s real GDP growth is expected to be steady at 6.5 per cent in fiscal 2026, despite uncertainties stemming from geopolitical turns and trade-related issues led by the US tariff actions. Crisil had forecasted the growth on two assumptions: another spell of normal monsoon and commodity prices continuing to remain soft; cooling food inflation, the tax benefits announced in the Union Budget 2025-2026, and lower borrowing costs are expected to drive discretionary consumption.
Meanwhile, the International Monetary Fund (IMF) remained positive on India’s growth and said that the country’s prudent macroeconomic policies and reforms have contributed to making the economy resilient and the fastest growing major economy, which are essential to achieve its ambition of becoming an advanced economy by 2047.
In terms of key economic parameters, Crisil said, manufacturing growth is expected to average 9.0 per cent per year over fiscals 2025-2031. The services sector is expected to grow slower, though. “As a result, the share of manufacturing in GDP will increase to around 20 per cent from approximately 17 per cent in fiscal 2025,” it said.
Further, with inflation softening in FY25 led by lower non-food inflation even as food inflation rose, Crisil stated that the softening in food inflation is expected to continue and pull down the headline going forward. Inflation too is softening in FY25 led by lower non-food inflation even as food inflation rose. The lower inflation and fiscal consolidation have pushed the RBI MPC to open doors for policy rate cuts with an expectation of another 50-75 bps reduction over the next fiscal after the central bank cut repo rate by 25 bps in February. India’s current account deficit (CAD), meanwhile, is expected to rise mildly in FY26.
Any signs of demand recovery?
The central government is pushing to recover demand through capital spending, tax cuts, and other incentives. On February 1, while presenting the Union Budget, Finance Minister Nirmala Sitharaman proposed to raise the capital expenditure target by 10.08 per cent to Rs 11.21 lakh crore for the next fiscal year starting April 1. With this, the government hopes to shore up flagging demand and consumption in the economy.
The Budget also proposed personal income tax reforms with a special focus on the middle class. The FM announced a rise in income tax exemption for individuals earning up to Rs 12 lakh per year. She had said that India will focus on boosting middle-class spending power, encouraging inclusive development and boosting private investment to strengthen growth.
What else can drive growth?
Acquisitions and mergers have become one of the most preferred routes by companies across most sectors to drive growth. Elara Capital said, “We believe, in the next phase, FMCG plays may be forced to buy growth (read acquisitions) and scale-up adjacent portfolios. Increasing competition (emergence of alternate distribution channels and new layers – D2C and regional) would keep a check on margins.”