HUL, ITC to Britannia: Nifty FMCG index consolidates — Should you buy or sell consumer stocks?

The FMCG index has continued to consolidate in September, trading at 56,500 levels. This means the Nifty FMCG pack is up only marginally, 0.7%, despite announcements on the GST reforms.

Amongst specific stocks, while Britannia Industries and Dabur India have gained up to 7%, ITC and Marico are almost flat. Hindustan Unilever (HUL) share price is slightly down.

The analysts are watchful of a multitude of factors to lift demand, namely the upcoming festive season, rural recovery helped by good monsoon, and declining inflation, among others.

In the past two to three years, weak consumption has hurt FMCG counters amid commodity inflation-driven price hikes. The price hikes outpaced income growth, as per analysts.

However, now this obstacle would be partially mitigated by the deflationary effect of the GST rate reduction. Additionally, the recent decrease in personal income tax, the approaching pay commission, the advantageous base for urban consumption, the easing of commodity prices (tea palm, coffee), and a healthy monsoon all bode positively for FMCG consumption over the next 12 to 15 months, as per analysts.

FMCG sector outlook

Analysts at Kotak Institutional Equities said that they expect volume/mix-led revenue growth starting in Q3. Select food categories (such as namkeen and biscuits) may also see some unorganised-to-organised shift as the lower GST rate could reduce the price gap. Further, the GST-rate cut would offer some headroom for price increases in the medium term (second half of FY 2027 and FY 2028), said the brokerage.

“We anticipate that the majority of businesses will pass the benefit on to customers (anti-profiteering provision) in the form of increased grammage, particularly in price point packs,” added Kotak. However, as per analysts, it remains to be seen if companies tweak prices to push premiumization.

Meanwhile, analysts at Antique Stock Broking believe that the GST rate cut is expected to drive volume growth (improve to mid-high single digit) across the majority of the FMCG companies. The benefit is likely to be passed towards the consumers depending upon the portfolio mix via increased grammages (in lower SKUs) and price cuts (in larger packs). It prefers GCPL, Marico and Emami in the consumer staples.

Britannia, Nestle and Colgate Palmolive (India) Ltd are expected to be the key beneficiaries of GST reforms, followed by Dabur India and Hindustan Lever as per Kotak.

However, there are some words of caution too.

The FMCG sector, including giants like HUL and Nestle, might experience a slower, more muted response despite rate reductions on essentials like soaps and toothpaste from 18% to 5%, said Divam Sharma, Co-Founder and Fund Manager at Green Portfolio PMS.

Their multi-layered distribution networks involving countless intermediaries, efficiency gains could leak out along the way, taking north of one to two years for full earnings growth to reflect in stocks, added Sharma.

Disclaimer: The views and recommendations above are those of individual analysts or brokerage companies, not Mint. We advise investors to check with certified experts before making any investment decisions.