How rural demand and inflation are shaping the FMCG sector’s Q2FY25 earnings?

The Fast-Moving Consumer Goods (FMCG) sector in India is preparing to release its second-quarter earnings for the financial year 2025, covering the period ending on September 30. This quarter is anticipated to showcase a modest revenue growth trend as the industry grapples with mixed factors, including weaker rural demand, inflationary pressures, and competition from smaller players. 

While the Nifty FMCG index surged 15.55% during the July to September quarter, outperforming the NIFTY 50 (+7.76%), the underlying growth story remains cautious. Here's a deeper look at what to expect in the sector's Q2FY25 performance.

Q2FY25 FMCG sector expectations

The upcoming earnings for the FMCG sector are likely to show revenue growth within the low to mid-single digits, largely propelled by moderate volume increases. Despite some signs of improvement, the sector continues to face several challenges that could impact profitability. Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA) growth is anticipated to remain modest, while net profit margins may face downward pressure. 

Key factors influencing the quarter's performance include a softer demand environment in rural areas, heavy rainfall affecting sales of certain products, and rising inflation impacting raw material costs. As a result, gross margins are expected to remain constrained, affecting the bottom line for many companies in the sector.

Rural demand and inflation: The twin challenges

One of the main hurdles affecting the FMCG sector's performance is the subdued demand from rural markets. The impact of erratic weather patterns, such as heavy rains, has influenced the consumption of seasonal products like beverages, ice creams, and even non-durable household goods. These conditions have made it challenging for companies to maintain robust revenue growth.

At the same time, inflationary pressures have raised the cost of key raw materials, limiting companies' potential to expand their gross margins. The effects are most evident in segments such as food and personal care, where cost inflation could weigh on earnings.

The role of competition in the FMCG sector

Big FMCG companies are also facing increased competition from local and regional players. These smaller companies have capitalised on consumer preferences by offering products with better margins and longer credit periods, allowing them to gain market share. This is particularly noticeable in categories like home care and packaged food, where regional brands are making headway.

To counter this, major FMCG players are expected to continue investing heavily in advertising and brand-building activities, aiming to protect their market share. Such investments could strain margins further, potentially affecting share market investment returns for those focusing on the FMCG sector.

Key insights on top FMCG companies

1. ITC: While the cigarette segment may experience slight volume growth, heavy flooding in regions like Andhra Pradesh and Telangana could negatively impact sales figures.
2. Colgate: The company is likely to maintain stable volume growth with some positive shifts in its product mix. However, higher input costs may cause a slight dip in gross margins.
3. Dabur: Anticipated revenue declines due to inventory adjustments and price pressures in the beverage segment. The general trade channel has also faced challenges, impacting overall growth.
4. Britannia: Expected to achieve volume growth driven by distribution expansion, although margins may experience compression due to inflationary trends.
5. Tata Consumer Products: Strong growth is expected from its salt and international business segments, while the tea portfolio may show signs of underperformance.
6. Marico: Projected high single-digit growth, led by Saffola Foods and international markets. However, intense competition in the mass segment could weigh on profit margins.

FMCG sector's performance in Q1FY25

The previous quarter (Q1FY25) saw the FMCG sector report moderate revenue growth, primarily driven by a steady recovery in rural demand. Companies in the sector managed to achieve mid-to-single-digit revenue growth despite facing headwinds like extreme heat in northern regions, increasing competition, and uncertainties linked to the upcoming general elections.

This recovery was underpinned by factors such as favourable monsoon conditions, expansion in rural distribution networks, and the introduction of region-specific products. While these drivers provided some resilience, sustaining this momentum into Q2FY25 could prove challenging, especially with ongoing inflationary pressures and a mixed-demand environment.

Implications for share market investment

The FMCG sector's mixed performance outlook may influence share market investment strategies, particularly for investors looking at FMCG stocks. As some of the top companies continue to face margin pressures and demand fluctuations, investors should focus on long-term growth trends and company-specific strategies for market share expansion.

With revenue growth in the sector expected to be around 5% and EBITDA showing marginal gains, share market investment decisions will need to factor in these modest earnings projections. Investors may find value in companies with diversified portfolios and strong brand equity, as these firms are better positioned to navigate the current challenges.

Conclusion

The FMCG sector's Q2FY25 earnings are poised to reflect a combination of moderate revenue growth and persistent challenges, such as weaker rural demand and rising costs. While some companies may demonstrate resilience through strategic investments and market diversification, overall profitability could remain under pressure. 

For those considering share market investment in FMCG stocks, a careful assessment of the sector's prospects and individual company strategies is essential to make informed investment decisions.