Market Discounting Biggest Perceived Challenge For FMCG Sector | Open Interest

With HUL, Nestle, Tata Consumers kickstarting the fourth quarter FMCG earnings season, trends indicate towards a recalibration of business structures as demand and supply chains begin to realign. This in turn, signals muted volume growth, at least in the first half the current financial year (FY26). The market expects low single-digit growth in this period and that too will be dependent on companies adjusting volumes to price points that offer value to consumers.

With HUL, Nestle, Tata Consumers kickstarting the fourth quarter FMCG earnings season, trends indicate towards a recalibration of business structures as demand and supply chains begin to realign. This in turn, signals muted volume growth, at least in the first half the current financial year (FY26). The market expects low single-digit growth in this period and that too will be dependent on companies adjusting volumes to price points that offer value to consumers.

Industry leader HUL's Q4 report card highlighted that the price-value equation will influence pricing and costs, in-turn moderating gross margins. In simple terms, companies will need to lower price points while reducing grammage, offering smaller-sized packs—to entice consumers. This will inevitably lead to lower volumes and drive higher marketing and advertising expenses. 

The year ahead will be difficult for FMCG companies as they try and navigate these tricky waters for better operating profit margins. Companies will be forced to defend market share and profitability simultaneously. Cost efficiencies and inventory management have helped shield margins thus far, but raw material inflation has now begun to impact financial statements, leaving companies with limited options. HUL has guided for a lower margin range of 22-23%, and similar trends from Nestlé and Tata Consumer indicate rough weather ahead in the next 12 months. 

Price growth, if any, will likely result from recalibrating grammages and introducing smaller stock keeping units or SKUs in premium categories. HUL has stated that it is actively adjusting price-pack architectures to stimulate consumption and accelerate consumer upgrades to higher-value products. In effect, companies are passing on commodity price deflation and modifying pack sizes while minimising the impact of raw material price increases. 

Despite global inflation driven by the ongoing regional geopolitical tensions due to tariff wars, raw material prices are expected to moderate in the second half of FY26, potentially supporting margin recovery. 

Two segments—home care and personal care—stand out, as companies have implemented price cuts to boost volumes and maintain market share. Major FMCG firms are focused on preserving their market positions across various categories as urban demand slows and rural demand gradually improves. 

The consumer distribution landscape is also undergoing significant shifts, particularly in urban areas, driven by Quick Commerce platforms which are now accessible in nearly 150 cities. As dark stores continue to rise at a steady pace, consumer behaviour is evolving. Shoppers, once focused on convenience, are increasingly prioritising discounts, shifting toward budget-conscious purchasing. This trend is affecting traditional distribution channels.

Companies like HUL have nearly doubled their product assortments to meet diverse consumer needs. Additionally, businesses are recognising the growing preference for specialty channels catering to specific customer requirements. 

Despite slowing urban demand, the FMCG index is up 5.5% over the past 12 months, though it remains nearly 14% below its 52-week high. The index has regained most of its losses since the start of the year. 

The graph above paints only part of the picture. The Nifty FMCG price-to-earnings (PE) ratio has undergone a de-rating. From a peak of 47.6 times forward PE in October, it has dropped to 39.4 times—a 20% decline from the top—mirroring the earnings trajectory of FMCG companies. To put things in contrast, the industry bellwether, HUL, has seen its peak forward PE fall from 64 times to 39 times. 

The market appears to have already factored in the impact of raw material inflation on profitability, as the recent rally in FMCG stocks suggests. Going forward, a recovery in consumption, driven by post-Budget 2025 cash inflows, a good monsoon, and stable raw material prices, could kickstart a trend reversal. At least that is what the players will be hoping for when they again declare their performance in July.