FMCG stocks are usually a good defensive bet. So why are they underperforming now?

The fast-moving consumer goods (FMCG) sector is usually touted as a defensive play, given its non-cyclical nature as these companies sell essential goods. Small wonder then that FMCG stocks are usually able to beat the returns of the benchmark Nifty50 index. But the sector has been unable to shield investors from stock market turmoil this time around. The Nifty FMCG index has fallen 19% in the past six months while the Nifty50 is down just 9%.

The fizzling out of urban consumption is a pain point that has weighed on the FMCG index. Demand challenges in the urban market, estimated to contribute around 60% of the industry’s revenue, are unlikely to wane soon. This, coupled with lingering margin pressure, has been prompting downward revisions in earnings estimates of large FMCG companies. A global equity market correction has further accentuated the pain in FMCG stocks.

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From FY10-19 the Nifty FMCG index outperformed the Nifty50 index, aided by supportive earnings growth scenarios, said Elara Securities (India). “While in phase I (FY11-15), growth was close to mid-teens with modest margin expansion for large companies, phase II (FY16-20) witnessed significant margin expansion even as revenue grew in mid-single digit,” it said. However, phase III (FY21-24) has been marked by lower revenue growth with no margin expansion.

Budget packs for premium brands

Management commentaries of large FMCG companies during the December quarter (Q3FY25) results highlighted that consumers were downtrading to smaller packs in premium segments. This tends to affect product mix and realisations. To beat the urban demand blues due to muted disposable incomes, and entice price-sensitive consumers, several FMCG giants have introduced access packs of premium brands in both traditional and modern retail channels.

Rising downtrading usually means increasing competition from regional and local companies as consumers switch to lower-cost brands. To cope, FMCG companies are increasing digital advertising to push premium products and growing their distribution reach in rural areas. There are expectations that the tax relief announced in Union Budget 2025-26, coupled with interest rate cuts and easing retail inflation, will increase disposable incomes for urban consumers. However, this is expected to play out only from Q2FY26 onwards.

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As for margins, input commodity prices are likely to stay elevated in the near term. “Inflation on a year-on-year basis continues for the staples universe in Q4FY25, but month-on-month trend indicates stabilisation or correction in the majority of the commodities,” said Yes Securities. “Our Consumer Staples Raw Material Inflation Index continues to see year-on-year inflation in the 1.8-2% range (0.4-0.6% month-on-month) for the last three months till February 2025,” added the report, dated 17 March. Brent crude oil, palm oil, wheat and tea are among the key inputs for the sector.

Room for more downside

FMCG companies have hiked prices recently, so margin pressure could be transitory. Still, no fireworks are expected in near-term earnings. “The ongoing weakness in urban consumption is likely to continue to weigh on the value/volume growth of FMCG players in Q4FY25E and H1FY26E. We assume continued weakness in consumption in 1HFY26E and trim EPS estimates (in the range of 0-4%) and fair values across the board,” said a Kotak Institutional Equities report dated 20 March.

Against this backdrop, the sector’s moderating valuation multiple is distressing, and remains exposed to more downside. Shares of Hindustan Unilever Ltd, Britannia Industries Ltd, Dabur India Ltd and Godrej Consumer Products Ltd are trading around 43 to 48 times their FY26 earnings estimates, showed Bloomberg data.

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