GST Reform Boost: Nifty FMCG index jumps 4% in 3 days — Is this the sector's big comeback & which stocks to buy?

Mint

7 hours ago

GST Reform Impact: The proposed revision in GST reforms, through a two-tier tax structure and lower tax rates on household goods, has driven not only the Indian stock market but also the fast-moving consumer goods (FMCG) segment.
Amid ₹ 1.98 lakh crore consumption boost expected from the GST rate rejig, the Nifty FMCG index has been caught in an uptrend, rallying nearly 4% during the three days till Wednesday, August 20.
According to analysts, Q1 FY26 marked a turning point for FMCG companies, with momentum shifting from valuation pressure to steady recovery. Following the Union Budget's direct tax (I-T slab) simplification in February, momentum improved, said Pankaj Singh, smallcase Manager and Founder & Principal Researcher – SmartWealth.ai. "The recovery has carried into the current quarter, with the index up another 2%, supported by a 2% rebound in valuations," Singh said.
Now, with the favourable monsoon and positive earnings trend — the question remains if FMCG stocks, once the darling of Dalal Street investors, can make their comeback with the GST rationalisation booster in place?
Rural demand, after a sharp deceleration during 2022 to mid-2024 amid several headwinds like stagnant wages, high inflation and the prolonged impact of the Covid-19 pandemic, has made a strong comeback in the last 12 months. The last 12 months saw a healthy rural recovery, although on a weak base. With macro parameters constantly improving, we expect that rural markets will sustain healthy growth trends in the coming quarters," said Motilal Oswal Financial Services.
Urban consumption following a sharp hit is also showing signs of revival, in a boost for FMCG companies. With easing inflation, falling interest rates and income tax savings, MOSL believes that urban demand pressure is bottoming out and recovery signs will be visible more clearly in the second half of the fiscal 2025-26 (FY26).
As a result, agri-linked upstream companies have reported stronger growth and margin expansion in Q1, benefiting from higher rural consumption.
After delivering 6% and 5% growth in FY24 and FY25, respectively, the revenue of consumer staples in MOSL's coverage saw a pickup in growth in first quarter of FY26, to 10%, mainly due to improved sales volumes. Most companies saw slightly better volume growth during this quarter, and their management teams sounded optimistic, said the brokerage.
"That said, margins remain under pressure across the sector because of sharp increases in the cost of key raw materials like palm oil and copra. To deal with this, many companies have raised product prices. If raw material prices stay stable, we expect margin pressure to ease starting from the third quarter of FY26," it added.
Ever since the announcement of GST reforms, the FMCG stocks have been rejoicing. But despite this, analysts are unconvinced of the index surging to its past glory.
G Chokkalingam, Founder, Equionomics Research, said that a revival in the FMCG sector is on cards — but not in a big way.
The Budget has already given a boost through direct tax cuts, and now, the PM has pushed for increased internet access — a bold and courageous move, said Chokkalingam. Both direct and indirect tax reforms are major positives for the middle class, which will help FMCG, according to him. But will it return to its golden days? He is doubtful.
"There's a structural shift happening with the rise of digital and new-age players. They're eating into the fast-growth territory. Regional players are also emerging, aided by the low cost of digital marketing. Earlier, a 30-second ad would cost ₹ 30–40 lakhs. Today, a few thousand rupees can get you visibility on social media. So, smaller and regional players are also gaining ground. Yes, the overall trend is positive, and the sector will improve — but a full-fledged revival to past glory is uncertain," he added.
Meanwhile, analysts believe the sector makes for a compelling bet in the medium term.
"FMCG is well-positioned to benefit from supportive policies and a strong macro backdrop. The PM's hint at GST rationalisation has raised hopes of a demand revival, especially in packaged foods and staples, by improving affordability and lowering compliance costs. Earlier tax relief and lower interest rates have already boosted disposable incomes. A favourable monsoon is expected to lift farm incomes, further supporting rural demand, which is outpacing urban markets. Meanwhile, input costs are stabilising after FY25 pressures, offering scope for better margins," said Harshal Dasani, Business Head at INVasset PMS.
While final clarity on GST changes is awaited, the alignment of tax reforms, rural demand and monsoon-led consumption makes FMCG a compelling medium-term allocation," said Dasani.
Brokerage MOSL believes that a consumption revival, while also positive for discretionary companies, is more likely to impact FCMG companies. "FMCG companies have been impacted the most, and the ask rate has gone down significantly; therefore, the sensitivity looks superior for FMCG companies," it opined.
Dasani said that for investors, the prudent strategy is to anchor portfolios in established FMCG names while allocating selectively to new-age disruptors for long-term growth optionality.
Singh, too, opined that traditional FMCG stocks remain the stability anchors. 'Policy reforms plus a good monsoon could make mass-market and agri-linked FMCG names the clear winners,' he added.
Nuvama Institutional Equities likes HUL, Britannia, Bikaji and Nestle following Q1 results announcement. Meanwhile, from the consumer discretionary space, it is bullish on United Breweries and Asian Paints. It also likes Dabur as it sees the blue-chip stock recovering on a soft base.
HUL, GCPL, and Marico are MOSL's top picks in the consumer staples space. "The next 12-24 months will be an interesting period for consumption, but we need to be more mindful of selecting the right portfolio," MOSL advised.
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.