FMCG stocks face margin pressure. Here's why

Mint

a day ago

The fast-moving consumer goods (FMCG) sector is seen as a favourite among investors due to its stable cash flows and performance even in turbulent times.
But recently, FMCG companies have been facing a new wave of margin pressure. From rising input costs to subdued demand, multiple forces are compressing the profitability for companies, and the markets are taking notice.
Market acknowledgement of this fact is reflected in the performance of the FMCG index. Looking at the broader markets over the past year, the Nifty FMCG index rose 0.96% as compared to a 9.06% increase in the Nifty50.
Here's a closer look at why FMCG stocks are under margin pressure right now.
Reasons for Margin Pressure
At the core of the problem is cost inflation. Sharp price rise in key raw materials- especially palm oil, wheat, maida, potato, cocoa, tea, etc, have pressured margins and have made it necessary for the companies to raise the prices.
But companies can pass on these costs through price hikes only to some extent.
The confluence of a few macro factors further impacted the margins, which have pushed global commodity prices higher. These factors are: geopolitical disturbances due to the Russia-Ukraine war, the Israel-Hamas war, and reciprocal trade tariffs by the US.
Slowdown in various advanced economies, including the US and the UK, and climate change (untimely monsoon, floods, droughts) are the other factors.
Managements of various top FMCG giants have highlighted the uncertainty in input costs and remain cautious in their margin guidance in the recent investor presentations.
The management of Hindustan Unilever Ltd (HUL) revised FY26 earnings before interest, tax, depreciation, and amortization (Ebitda) margin guidance downward from 23–24% to 22–23% due to inflation.
Operating profit margins (OPM) for FY25 of Marico Ltd are lower, from 21% to 20%, while Britannia's margins have fallen from 18% to 16.4%.
Further, the pace of real GDP growth decreased from 9.2% in FY24 to 6.5% in FY25. The weakness in consumption was seen in the flat volume growth of the FMCG sector, both in rural and urban areas.
To make matters worse, India's consumer food price index fluctuated during the previous fiscal year, with a peak in October 2024 (marking an inflation rate of 10.08%).
The cumulative impact of inflationary pressures, as well as low GDP growth, has pulled down household savings and reduced consumption expenditure.
Another factor contributing to the margin pressure is the intense competition in the FMCG space, not just from large brands but also from aggressive local players and small direct-to-consumer (D2C) brands.
Recovery signs in the FMCG space
Despite a weak short-term outlook, the FMCG companies are cautiously positive for the FY26 recovery.
Management sees macro factors to normalise soon, including stabilising CPI inflation, easing raw material prices.
India's overall retail inflation fell to 3.16% in April 2025, the lowest in nearly six years.
Companies are implementing gradual price increases to slowly rebuild and recover their margins without disturbing the demand.
Consumption expenditure is expected to pick up slowly due to the continuous recovery in rural demand because of the good monsoon.
Further, improvement in urban demand can be seen due to lower inflation levels and tax cuts announced in the Union Budget, which is expected to boost disposable incomes.
What could turn things around?
The companies are focusing on deepening penetration and distribution in core and growth categories.
The companies continue to execute on their strategy of premiumization (a shift towards branded products) and innovation.
Companies are improving supply chain management and achieving cost optimization through modern trade, e-commerce, quick commerce, and digital transformation.
They are continuously focusing on volume-led competitive growth.
Conclusion
The FMCG stocks are facing margin pressures right now.
Rising input costs, weak demand, and intense competition, all putting pressure on the profitability of the companies and affecting the revenue growth as well.
For FMCG companies, the solution lies in premiumization, cost optimization, deeper penetration, and digital transformation.
Investors should be selective with stock picking, looking for companies that are adjusting to changing consumer preferences through product innovation and deeper distribution.
Investors should evaluate the company's fundamentals, corporate governance, and valuations of the stock before making any investment decisions.
Happy Investing.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com