Another tough year for consumer staple companies?

“Our universe reported a <5% volume growth,” said analysts at Jefferies India in a report dated 6 January. Sure, 2024 brought relief on input cost inflation but note that a few key inputs have been seeing pressure in recent months. Overall, FY25 estimated earnings per share (EPS) growth is estimated at about 3%, the lowest in almost a decade, pointed out Jefferies.

Read this | FMCG Q3 preview: Rural consumption holds up, but urban slump may weigh on consumer goods companies

As 2025 unfolds, immediate relief seems unlikely. Companies are set to announce their December quarter (Q3FY25) results, which are expected to reflect price hikes, partially offset by subdued volume growth driven by weak urban demand.

“While the return of price hike was a much-awaited welcome step, categories with sharp double-digit price hikes (such as soaps, tea, coffee, edible oils, some hair oils etc) likely witnessed downgrading and even decline in volumes,” said a report by Nomura Global Markets Research.

Against this backdrop, pre-quarter updates offer little excitement. In December, Godrej Consumer Products Ltd (GCPL) had cautioned about weaker margins and volumes for Q3FY25. In its business update, the company indicated that its India business is expected to report a largely flat volume growth for the quarter. For context, GCPL had reported a domestic volume growth of 7-8% during H1FY25.

Read this | Godrej Consumer’s profit warning intensifies gloom in FMCG sector

Dabur India Ltd expects consolidated Q3 revenue growth to be in low-single-digit. In the India business, Dabur expects HPC (home & personal care) to grow in mid-to-high single digits, while health care is expected to be flattish owing to a delayed onset of winter. Marico Ltd’s Q3 update was slightly encouraging. It said consolidated business delivered mid-teen year-on-year revenue growth.

Nevertheless, margins could be a sore spot. Nomura expects all companies to see year-on-year operating margin contraction in Q3. “Despite the high raw material prices, we believe companies are likely to have sustained their high A&P spends to stay competitive and drive volumes,” said the Nomura report dated 31 December.

Investors will closely monitor management commentaries on the demand environment, as usual. Notably, some anticipate the earnings downgrade cycle to persist in Q3 results, which could have a bearing on the near-term performance of stocks. The subdued sentiment is already reflected in market performance. The Nifty FMCG index has slipped 1.5% over the past year, underperforming the Nifty50, which climbed 9% during the same period.

“FMCG sector valuations have seen sharp derating in the last three months (about 24% derating from the peak; one-year forward price-to-earnings multiple ex-ITC now at 48x), considering the muted demand setting and inflationary raw material backdrop,” said an Emkay Global Financial Services report dated 3 January.

Emkay highlighted the upcoming Union Budget as a near-term catalyst, emphasizing that central government measures to revive the consumption cycle will be crucial.

Also read | Vivek Kaul: The Union budget should focus on reviving private consumption

Looking beyond Q3 results, improving trends in rural demand will be a key factor to monitor, as they could help boost volume growth in FY26. Still, overall revenue growth is likely to be led more by pricing increases than by volume expansion.

“After two consecutive years of near mid, single-digit revenue growth in FY24-25e, we expect revenue growth to be back in double-digits (in FY26), also helped by pricing actions which had limited impact in the past few quarters,” said Jefferies.