ITC, Marico to Britannia: Why are FMCG stocks under pressure today? Explained | Stock Market News

Stock Market Today: FMCG stocks came under significant selling pressure on Monday, December 9 as a weak mid-quarter business update from Godrej Consumer Products raised concerns across the sector about demand revival.

Thirteen of the 15 constituents of the Nifty FMCG stocks were trading in the red, with Godrej Consumer Products as the top laggard, down 9.3%, followed by other major stocks such as Marico, Hindustan Unilever, Tata Consumer, Dabur, Colgate-Palmolive, and Nestle, which lost between 2% and 4%.

Indian FMCG companies are currently grappling with twin challenges: rising commodity prices and weak demand from urban consumers, which severely impacted margins in the second quarter. The mid-quarter update from Godrej Consumer Products suggested that demand conditions are expected to remain weak in the current quarter as well.

Godrej Consumer highlighted that demand conditions in India have been subdued for the past few months, as reflected in overall FMCG market growth. The surge in palm oil and derivatives prices to the extent of a YoY increase of 20-30% has impacted the soaps category, which represents one-third of the company’s standalone business revenue.

To offset these rising costs, the company has implemented price hikes, reduced pack sizes, and cut trade schemes. While these measures are not expected to significantly affect consumption, they may reduce inventory levels. The company expects volume growth to normalise once prices stabilise in the coming months.

In addition, unfavourable weather conditions, including delayed winters and a cyclone, have impacted the Home Insecticides segment, which also contributes about one-third to the company’s revenue. However, other product categories are performing well, with the company expecting double-digit underlying volume growth (UVG).

As a result, the company anticipates flat UVG and mid-single-digit sales growth for the quarter. While the previous year’s exceptional EBITDA margin of 29.7% was above the typical 24-27% range, the current inflationary pressures are expected to lead to a temporary decline in margins.

Rising food inflation, lower disposable income weigh on FMCG sales

FMCG companies, in their post-Q2FY25 call, highlighted the significant impact of declining sales in urban India as a key factor behind their underperformance. Urban demand, which accounts for about two-thirds of the FMCG business, saw its volume growth more than halve in 2024 due to a rise in food inflation.

The sluggish job market, with limited new employment opportunities and lower disposable incomes, exacerbated the situation, making it increasingly difficult for urban consumers to maintain their previous spending levels.

The finance ministry’s monthly economic report highlighted a significant drop in volume growth in the FMCG sector, from 10.1% in Q1 to just 2.8% in Q2.

According to Japanese brokerage firm Nomura, wage expense growth among listed non-financial companies was just 0.8% in Q2FY25, compared to 10.8% in FY23. For example, the IT sector has reduced recruitment, limited wage hikes, and resorted to layoffs.

The higher inflation has also prompted the RBI to halt the rate cuts in its December meeting and revise its inflation projection for FY25 upwards by 30 bps to 4.8%. The projection for Q3FY25 has been adjusted to 5.7% from an earlier estimate of 4.8%, while Q4FY25 is now expected to be 4.5%, up from the previous 4.2%.

The central bank expects inflation to remain elevated in the ongoing quarter, with a potential deceleration only in the fourth quarter of the current fiscal year due to seasonal correction in vegetable prices. 

Nifty FMCG extends losing streak to 3rd month

The Nifty FMCG index has tumbled another 2.40% so far this month, following declines of 2.13% in November and 9.67% in October, marking a continued downtrend. This marks a three-month losing streak, with the index turning negative for 2024, currently down by 0.77%. Notably, this is the first annual decline for the index since 2019.

Despite strong rural demand, the slowdown in urban spending is weighing heavily on investor sentiment. Rural demand, while resilient, represents only one-third of overall FMCG sales and cannot offset the challenges posed by sluggish urban markets, as per experts.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.