FMCG Faces the Freeze as Top 10 AMCs Dim Their Bets on the Sector

FMCG sector is likely to face the heat as elevated food inflation coupled with softened urban demand might take a toll on the industry's quarterly earnings. The subdued outlook has further impacted the stock outlook. Top AMCs (Asset Management Companies) have become more cautious about FMCG stocks as they have increased their underweight position from 1.5 per cent to 1.7 per cent.

While 4 out of 10 AMCs were still optimistic about the sector, September witnessed a shift in this trend. As per a report by Elara Securities, none of the top 10 AMCs are betting on the FMCG space.

On a year-to-date basis, the Nifty FMCG index has delivered returns of nearly 5.87 per cent, compared to the Nifty50's gain of over 14 per cent.

As of now, only Tata Consumers and Nestle India are among the top FMCG companies that have announced their Q2FY25 results. Both companies witnessed a sharp decline in their share price after reporting their quarterly earnings as the results failed to impress the D-street.

While Tata Consumer Products witnessed a marginal rise in net profit, surging by just 0.9 per cent to Rs 367.21 crore, Nestle India reported an even dimmer outlook. The company reported a consolidated net profit of Rs 899.5 crore in Q2FY25, lower than last year's figure which stood at Rs 908 crore. Both the FMCG players also witnessed a margin squeeze.

While gross margins still sit at comfortable levels despite a modest drop, there is a chance that sequential pressure might build up in the near term, as per Axis Securities. "We expect majority of the companies to see QoQ (Quarter on quarter) pressure on gross margins indicating increasing inflation and utilisation of higher priced raw material inventory," the brokerage firm stated in a report.

Urban Demand Dips, Rural Markets Stay Steady

While urban consumption levels have always surpassed that of rural, there has been a stark shift in the trend recently. An August report from market research firm Nielsen IQ showed that rural consumption exhibited robust growth, rising by 5.2 per cent in volume. This nearly doubled the 2.8 per cent growth figure recorded in urban markets.

The revival in trend was also pointed out by Sunil D'Souza, managing director and chief executive officer of Tata Consumer during an earnings call.

D'Souza pointed out that while rural demand is witnessing a positive trajectory, urban demand has largely softened.

"I think a good monsoon and therefore the kharif crop is only going to help in the rural recovery. But it is still not at the stage where it gives us a double-digit volume growth and penetration growth, et cetera. But while this has happened, urban has softened," he said during the earnings call.

Tata Consumer Products also witnessed an uptick in rural demand, which outpaced the growth in urban areas.

According to a report by Prabhudas Lilladher, rural areas experienced stronger growth than urban areas in essential goods, while demand for discretionary products remained largely tepid.

"Rural demand is showing signs of improvement while urban demand growth is steady, partly impacted by food inflation and recent floods. Decline in food inflation and impact of normal monsoons is likely to improve demand growth in coming quarters," the brokerage firm stated in its report.

While the urban vs rural demand trajectory remains a key factor to watch out for, the FMCG sector might need more than just a mere demand push to win over investors.