The Nifty FMCG fell 10.59% in February, its worst monthly performance since October 2008 when it had declined 16.52% during the Lehman Brothers bankruptcy crisis. The index recorded its longest losing streak in 18 years.
On Friday, the index declined 2.62%, underperforming the broader market, where the NSE Nifty 50 fell 1.86%. All 15 constituent stocks ended in the red, leading to a market-cap erosion of Rs 58,402.1 crore in a single day.
Since the stock market peak on Sept. 27, 2024, the index has seen a significant correction, with valuations contracting across key constituents. Varun Beverages Ltd.'s 12-month forward price-to-earnings ratio fell Rs 20.92 to Rs 43.05, while Colgate-Palmolive (India) Ltd. and United Spirits Ltd. also saw significant declines in valuation.
The Short Budget Jump
The Nifty FMCG gained in the two trading sessions ahead of the Union Budget and posted the strongest rally among sectors on Budget day, rising 3.01%.
The gains were fuelled by expectations that the income-tax benefits announced in the budget would boost consumer spending. However, the initial optimism faded as investors factored in that these measures would primarily benefit discretionary segments rather than daily essentials and staples.
Why the Fall Since?
The sector's decline was exacerbated by weak urban demand, subdued earnings growth and rising input costs. Varun Beverages saw the steepest drop during the month, falling 18.76%, followed by Colgate-Palmolive and ITC Ltd.
The overall correction in valuations was driven by concerns over sluggish volume growth, cost pressures and a cautious stance from companies regarding price hikes.
Sector Headwinds
The FMCG sector has been under sustained pressure for the past three quarters due to weak urban demand despite improving rural consumption.
According to Nuvama Research, rural volume growth (9.9%) has outpaced urban volume growth (5%) for four consecutive quarters, supported by government welfare schemes, higher rural incomes from a good monsoon and minimum-support-price hikes.
However, urban demand remains weak due to high rental inflation and sluggish wage growth, which is likely to persist until the first quarter of the next financial year.
Input cost inflation continues to be a challenge, with rising prices of key raw materials like palm oil, tea and coffee impacting the gross margins. Companies like Godrej Consumer Products Ltd., Bikaji Foods International Ltd. and Tata Consumer Products Ltd. are expected to bear the brunt of these rising costs.
Nuvama pointed out that firms with greater rural exposure, such as Dabur India Ltd. and Berger Paints Ltd., are likely to outperform their urban-focused counterparts like Colgate-Palmolive and Asian Paints Ltd. in the near term.
Emkay Global highlighted that soaring palm-oil prices removed its status as the "cheapest edible oil", with prices expected to remain firm amid restrained supply. Inflation relief is anticipated only from the second quarter of fiscal 2026, with a gross-margin recovery expected in the latter half of the fiscal.
Valuation Trends
The FMCG sector valuations, while holding steady at the historical 10-year mean, are trading at an 11% discount to the five-year average, according to Emkay.
Arresting further earnings cuts will be key for valuation stability, and analysts emphasise the need for stronger execution from the company's management to counter the dual challenges of weak demand and inflation.
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