Marginal Improvement In Demand For Staples Amid Urban Weakness, Says Nomura

Nomura's latest market strategy note on India's consumer sector shows a mixed bag of trends for 4QFY25, with marginal improvements in demand for staples and sustained pressure on operating profit margins.

The report indicates that sales of staples grew 6% year-on-year, while Ebitda saw a modest 1% increase. The gross profit margin and operating profit margin were down 230 basis points and 110 bp YoY, respectively. "Staples' demand improved, but only marginally, and is soft compared to historical averages," the report said.

The note highlights a stark contrast between urban and rural demand. Urban demand growth slowed to 2.6% in 4QFY25 from 5% in 3QFY25, impacted by high inflation earlier in the year.

Conversely, rural demand continued to grow in the high-single digits, supported by an above-normal monsoon and a bumper harvest. "Rural/tier 3 and 4 cities are performing better than tier 1 and 2 cities," Nomura noted.

Pricing-led growth was higher quarter-on-quarter, with categories like coconut hair oil and toothpaste witnessing new price hikes. "Revenue from staples grew 6% YoY in 4Q, above its eight-quarter average growth of 4.8%," the report highlighted. Going forward, Nomura expects rural volume growth to gradually improve, while urban demand remains stable or shows slight improvement.

Discretionary demand remained soft-to-stable, except for jewellery, which saw robust growth driven by high gold prices. Paint companies delivered lower-than-expected volume growth due to a high base and rising competitive intensity. "Revenue growth in paints was -0.6% YoY versus its eight-quarter average of 2%," Nomura stated.

The brokerage has forecast moderate inflation levels and an above-normal monsoon for the year, which should support rural volume growth. However, price hikes are expected to remain range-bound due to the softness in key raw material prices. "We expect rural volume growth to witness gradual improvement, while urban remains stable or shows slight improvement," the report said.