FMCG margin recovery likely in Q2 and Q3; Britannia, HUL, Nestlé among top picks: Abneesh Roy

Economic Times

a day ago

"Coming to your specific question on EBITDA margins—my sense is that for most companies, the worst is behind us. HUL, for example, has proactively reduced its margin as a strategic choice, aiming for growth, which has led to a slightly lower margin profile. However, from an outlook perspective, costs of coffee and tea are correcting, which should help their margins. Even in Q1, some commodities like detergent inputs were under control. Now PFAD, which is used in soaps, is also expected to correct, given that palm oil prices have come down," says Abneesh Roy, ED, Nuvama Institutional Equities.
ADVERTISEMENT Do you expect margin expansion to be a consistent trend in Q2 and Q3 across the sector? Which companies are best positioned to lead this recovery, especially considering commodity cost deflation and evolving consumption patterns?
Abneesh Roy: Yes, in most of the FMCG company results, we've seen that either India volume growth has exceeded expectations or met them. So clearly, in Q1, the early signs of an urban slowdown have now paused, and a gradual urban recovery is starting to emerge. Even in ITC's cigarette business, for example, cigarette volume growth has accelerated. On a two-year basis in Q1, it showed over 9% volume growth compared to about 7% in Q4.
For HUL—being the sector's behemoth—volume growth was 4% versus 2% in the previous quarter. We're seeing a gradual recovery across most categories and companies in Q2 and beyond, except in summer-related categories. For instance, both Varun Beverages and Emami saw year-on-year volume declines in summer categories—Varun was down 7%. Even in Q2, despite a favourable base, the high monsoon impact on Varun Beverages will need to be monitored.
Coming to your specific question on EBITDA margins—my sense is that for most companies, the worst is behind us. HUL, for example, has proactively reduced its margin as a strategic choice, aiming for growth, which has led to a slightly lower margin profile. However, from an outlook perspective, costs of coffee and tea are correcting, which should help their margins. Even in Q1, some commodities like detergent inputs were under control. Now PFAD, which is used in soaps, is also expected to correct, given that palm oil prices have come down.But again, in HUL's case, there has been a conscious reduction in EBITDA margin—around 100 bps—to support growth. On the other hand, for companies like ITC, we expect margin improvement in Q2 and Q3. In Q1, ITC faced three challenges: higher tobacco costs (which have now corrected), a larger contribution from the education and stationery business where Chinese imports had an impact, and subdued FMCG margins. However, in Q2 and Q3, the share of the stationery business will decline seasonally, and cost deflation—especially in palm oil—will support margin expansion in the FMCG segment.Even Nestlé faced high coffee costs in Q1, but coffee prices have since corrected by 30%. Tea companies also have a favourable outlook due to a good crop. Overall, for most companies, Q1 was the margin bottom—except for HUL, where it was a deliberate strategy. But frankly, I don't see much reason to worry about HUL. We remain positive—it should see improving volumes and overall sales. Even the parent company, Unilever, has made strong, positive comments regarding HUL.
ADVERTISEMENT What about urban recovery? Managements have noted that green shoots are visible. Do you think this will translate into a more sustained recovery, and is the worst of the weak urban demand now behind us?
Abneesh Roy: Yes, that's a good question. Urban consumption in FMCG, QSR, apparel, durables, and other consumption segments has been sluggish. But my sense is that we will see gradual green shoots in FMCG. Rural will still grow faster than urban in the next three quarters. However, from negative volume growth in urban FMCG over the past three to four quarters, we're now moving toward gradual growth across most categories and companies.
ADVERTISEMENT Food inflation is under control, overall inflation is moderate, there have been interest rate cuts, and the government has offered higher tax rebates—all of which help FMCG demand. But in other discretionary consumption areas, challenges remain. For instance, the IT sector is witnessing job cuts—TCS let go of 12,000 people—and overall IT hiring is weak, which will impact retail and discretionary consumption.However, in urban FMCG, the issue was primarily at the lower end of the income pyramid. There, softer food inflation and rate cuts have helped. The retail and QSR challenges, by contrast, will likely affect the mid-to-top-end of consumption. Still, for FMCG, urban green shoots are emerging. Even in paints, we are positive—Asian Paints, for instance, is expected to benefit.
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What's your view on pricing power across FMCG going forward? Do companies still have room to raise prices, or is that cycle behind us, given the competition and subdued demand?
Abneesh Roy: In fact, we take the opposite view. There are three important things here. Historically, FMCG companies have taken 2–3% price hikes annually. But currently, there's no need. Most raw material costs are coming down—coffee is down 30%, the tea crop looks good, and prices of palm oil and crude are under control. Nearly every key FMCG raw material is stable. With a good monsoon, agri-inputs and dairy costs should also remain benign. So, I don't see any reason for the usual 2–3% price hike, since there's no cost inflation.As I said, the worst is behind us in urban markets, and a gradual recovery is on the cards—so macros are supportive. In terms of competition, India's FMCG sector has always been competitive. But even there, we think the worst is behind us, particularly with D2C brands. Many of them are focusing on profitability now. Larger listed companies like HUL, ITC, and Marico have acquired strong D2C brands—Minimalist, OZiva, etc. The remaining smaller, unlisted D2C players are shifting focus toward profit as well.
ADVERTISEMENT So, D2C players won't disappear, but we expect less aggressive pricing and less disruption. Even Q-commerce and e-commerce platforms—if you look at category leaders—they now have strong partnerships with large FMCG companies. Quick commerce is also consolidating, reducing the number of dark stores. This is good news for large FMCG players.
While staples and core FMCG seem to be recovering, what's your take on big-box retail? After a mixed set of results from DMart, what can we expect from Trent this week?
Abneesh Roy: The outlook for Trent was already shared at the AGM, so to an extent, the Q1 sales numbers are priced in. There are two issues here. First, the base has been high over the past few years, so some catch-up is happening. Second, apparel, QSR, and retail are still being impacted by weak IT job growth and lower salary hikes—this segment is important for apparel and retail consumption. Third, there was a timing shift—some festivals impacted Q4 this year, not Q1. VMart mentioned this, and other companies have echoed it. As for Avenue Supermarts (DMart), their entry into Uttar Pradesh is a big positive. Historically, they've opened 40–50 stores per year, but now, with UP in the mix, store addition should accelerate. Over the next 3–5 years, DMart's expansion will likely get a strong boost. Their CEO Neville has highlighted this as a key strategic focus. While competition from quick commerce remains, the store expansion story is intact and will be a tailwind. UP is India's largest state, and entry into Agra is a strong signal of things to come.
Lastly, help us understand your pecking order in the FMCG and consumption space. Which stocks do you prefer for the next 6–12 months?
Abneesh Roy: We are more positive on FMCG and paints. In FMCG, we like Britannia—results are expected this week, and we expect strong numbers in FY26 in terms of volume, sales, and margins. We also like Hindustan Unilever—we've seen strong commentary from both the company and its parent. Nestlé is another pick; coffee costs are down 30%, so from next quarter, we should see margin recovery.
In paints, we like Asian Paints—competition has stabilised and urban demand is picking up slightly. We also like Bikaji. Overall, FMCG should do well. We're also seeing investor rotation from sectors facing headwinds, like IT, into FMCG. Demand and margin outlooks both look favourable in FY26.