The fast-moving consumer goods (FMCG) sector is likely to report muted results in the fourth quarter of 2024-25 (Q4FY25) due to weakness in urban consumption. The weakness may persist through the first half of 2025-26 (H1FY26).
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Rural growth, which contributes around a third of total consumption for the FMCG sector, is stable, but not accelerating.
Inflation in commodities like palm oil, tea, and coffee is also likely to drag down margins.
Hence, analysts are reducing earnings estimates to low single digits across the sector, with a few exceptions.
The FMCG sector’s forward price-to-earnings ratio (P/E) is near its historical mean, with investors waiting for demand recovery or lower raw material prices.
If there is no recovery through H1FY26, we may see valuations drop below historical means.
FMCG companies have increased their promotional intensity with higher discounting in modern trade and ecommerce, which is a sign of competitive intensity.
The companies carried out price hikes in Q4FY25 to offset inflationary pressures, but realisations are unlikely to improve much.
Sales growth may see moderate improvement at best while gross margin pressures will persist. Companies are generally focused on generating sequentially better volume.
Dabur is one of the majors which may be hard hit. The stock has reacted down in recent sessions.
In its pre-quarterly business update for Q4FY25, the company says rural consumption has remained resilient and has continued to grow faster than urban.
General trade remained under pressure, while modern trade, ecommerce, and quick commerce had growth momentum.
The Budget may kickstart some consumption and support recovery.
In the domestic market, Dabur’s culinary business like the brands under “Hommade” and “Badshah” are expected to post double-digit growth.
But the overall Indian business revenue will decline by mid-single digits due to a delayed, short winter and urban slowdown.
The decline is on a low base of Q4FY24, when revenue grew only 3 per cent.
The international business is expected to register double-digit growth in constant currency terms, led by the Middle East and North Africa (MENA) region, Egypt, and Bangladesh.
The Dabur management expects consolidated revenue to remain flat after 3 per cent Y-o-Y growth in Q3FY25, and 5 per cent growth in Q4FY24.
The operating profit margin is expected to contract 150-175 basis points Y-o-Y due to a combination of inflation and operating deleverage.
The decline in domestic business by mid-single digits is a key concern for investors.
Analysts expect the decline to be across most segments. Given the stress, earnings expectations are likely to be reduced significantly.
Valuations may also be reduced from the historical average valuation of price-to-earnings of 40 times to around 37 times or even lower.
However, Dabur garners 45 per cent of its revenue from the rural segment where growth has been better and this could help it sustain business and maybe deliver a positive surprise.
Expect the company to cut ad spends by around 9 per cent on an absolute basis, to around 6 per cent of sales in Q4FY25.
The bull case would be based on demand recovery and execution ramp up.
In that case, revenues could grow by 7 per cent annually and earnings by 9 per cent annually over FY25-27.
Until there is a demand recovery, value investors could look for a deep enough correction where the stock becomes attractive.
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