GST 2.0 to boost consumption, says Motilal Oswal; favours HUL, GCPL, Marico

Business Standard

11 hours ago

India's fast-moving consumer goods (FMCG) sector may experience a turnaround going ahead as the government continues to focus on consumption revival, according to domestic brokerage Motilal Oswal. Prime Minister Narendra Modi, on the occasion of Independence Day (August 15, 2025), made announcements regarding goods and services tax (GST) rate rationalisation and simplification, which is expected to further accelerate this recovery.
This is in addition to the income tax relief provided under the new tax regime in the last Union Budget 2025-26, in potential savings of ₹1 trillion for taxpayers, the brokerage noted.
While a consumption revival will benefit discretionary companies as well, FMCG companies are expected to show superior sensitivity due to their significant impact from the recent downturn and reduced expectations, according to the brokerage.
Among staple companies, Motilal Oswal continues to favour Hindustan Unilever (HUL), Godrej Consumer Products (GCPL), and Marico, expecting these companies to benefit from the anticipated sector recovery.
GST reforms to simplify the rate structure
Even though the details of the GST restructuring have not been disclosed yet, the government is expected to propose a simplified two-slab system: 5 per cent and 18 per cent from the existing multi-tier rates: 5 per cent, 12 per cent, 18 per cent, 28 per cent. According to reports, 99 per cent of items currently in the 12 per cent slab are likely to move to 5 per cent, benefiting everyday consumer goods. Around 90 per cent of the items in the 28 per cent slab may be moved to 18 per cent. A special 40 per cent GST slab is proposed for 5-7 items (sin or luxury goods). The proposal is expected to be discussed in the next GST council meeting in Sep-Oct'25. ALSO READ |
Rural consumption set for further recovery
Rural India had seen a sharp growth deceleration during 2022 to mid-2024 as several headwinds impacted the rural economy, such as stagnant wages, high inflation, and the prolonged impact of the Covid-19 pandemic, according to the brokerage. However, the last 12 months saw a healthy rural recovery, although on a weak base.
With macro parameters constantly improving, Motilal Oswal expects rural markets to sustain healthy growth trends in the coming quarters. A promising start to the monsoon season, a rebound in rural wages supported by easing inflation, and increased government expenditure are laying the foundation for a broad-based rural revival.
Urban consumption at an inflection point
The brokerage reckons that urban demand pressure is bottoming out and recovery signs will be visible more clearly in H2FY26. With easing inflation, falling interest rates, and income tax savings, analysts are seeing some green shoots in urban markets. Besides, premiumisation and positive urban sentiment are also driving consumption.
Decent Q1 performance
Motilal Oswal's staples universe delivered 6 per cent/5 per cent revenue growth in FY24/FY25. In Q1FY26, revenue growth jumped to 10 per cent, aided by better volumes. Most companies reported slightly better volume growth in Q1FY26. Certainly, Q1 revenue growth and management commentary were buoyant. Margin weakness persists across the names, led by steep inflation in palm oil, copra, etc. Most companies have increased prices to counter inflation, and expect that if input prices remain stable, then margin pressure should ease from Q3FY26 onward.
Companies gear up for new product launches
FMCG companies are actively preparing to capitalise on the consumption revival opportunity. There is a clear focus on launching relevant new products targeting the value segment and mass consumers.
Most companies' revenue growth in the past two years had fallen below their historical averages due to price cuts, weak rural sentiment, and changing consumer preferences in urban areas, including shifts toward direct-to-consumer (D2C) brands and e-commerce channels.
Margin expansion on the horizon
Commodity prices have been easing with some volatility, setting the stage for potential gross margin expansion. The gross margin impact is expected to be reflected from the third quarter of FY26, with possibilities of further expansion if commodity prices continue their downward trend, the brokerage noted.
This combination of growth initiatives by companies and macro-level revival is expected to restore growth momentum, with most companies likely to deliver volume-driven revenue growth.