Rural revival, GST cuts, and favorable commodity costs drive volume recovery; but what next for stocks
The beleaguered fast-moving consumer goods sector is showing its first convincing signs of revival after years of volume stagnation, margin pressure, and rural demand weakness. But investors betting on the recovery may already be late to the party, with leading stocks having rallied sharply from their 2024 lows and valuations offering limited cushion if the upturn disappoints.
The brokerage’s FMCG coverage universe—including heavyweights like Hindustan Unilever, Nestle, Britannia, ITC, Marico and Dabur—delivered 7.5% year-on-year revenue growth in Q3FY26, a sharp acceleration from just 2% in the previous quarter.
Strip out ITC’s relatively stable performance, and the improvement looks even more dramatic: underlying companies posted 8.3% growth in Q3 versus 3.7% in Q2. More importantly, volume growth—the metric that actually matters for sustainable FMCG recovery—jumped to 5.4% from 1.7% quarter-on-quarter.
“FMCG Industry has seen early signs of pick-up in demand on account of favourable macros (moderating inflation, favorable monsoon, healthy crop outlook) as well as govt initiatives (GST rationalization, income tax cut),” Centrum noted, adding that “we believe, the sector has seen challenges on growth as well as margin front in the last few years which are largely behind us.”
The GST Windfall and Exit Velocity
The third quarter wasn’t without disruptions. The July 2024 GST rate cut on certain biscuit categories from 18% to 5% created temporary chaos as companies adjusted pack sizes, pricing, and channel inventory. “While Q3 saw one-off impact due to GST led disruptions, exit growth across companies has been healthy which makes up more upbeat on Q4 outlook,” Centrum stated.
Exit growth rates—how companies finished the quarter rather than average performance across three months—matter more for forward-looking investors. Management commentary across FMCG companies highlighted that December and January saw acceleration as GST-related inventory adjustments concluded and restocking began.
“Q3 has seen some benefit of restocking as well as pick-up in volumes due to grammage increases,” Centrum noted, pointing to companies reverting to higher grammage packs at traditional price points like Rs 5 and Rs 10 after the GST reduction made economics viable.
The biscuits category exemplifies the shift. Britannia, as the market leader, benefited most directly from GST rationalization bringing biscuits to parity with other snacking categories. The company’s volume momentum improved sequentially, validating the thesis that lower taxes would translate to either better margins or increased consumption depending on competitive intensity.
Where Growth Is Actually Coming From
Centrum’s analysis of management commentary across Q3 earnings calls reveals which categories and channels are driving the recovery. “Some of the key highlights from management commentary in Q3 was: (i) improving growth trajectory across companies as GST led disruption subside, (ii) exit growth rates across companies has been healthy and outlook for Q4 remains strong, (iii) foods has seen a clear pick-up in terms of volume momentum (case in point Nestle, Brit performance),” the brokerage reported.
The foods category revival is significant. Nestle and Britannia both saw volume-led growth after quarters of either volume decline or stagnation. Noodles, despite increased competitive intensity, delivered volume growth for Nestle. Confectionery and beverages continued double-digit expansion. For Britannia, the combination of GST benefits and improving rural demand created a tailwind absent for the past two years.
Personal care categories showed mixed signals. “(iv) in terms of HPC, hair oil category (Bajaj Consumer, MRCO, Dabur) has seen a pick-up,” Centrum noted, highlighting that even sticky categories like hair oil—which had faced prolonged weakness—are stabilizing. Marico’s Parachute coconut oil posted flat volumes despite sharp price increases, a testament to pricing power returning as input costs moderate.
The channel mix continues evolving rapidly. “(vi) quick commerce continues to lead growth,” Centrum observed, with companies reporting that instant delivery platforms like Blinkit, Instamart and Zepto now contribute materially to urban sales and are growing at 40-50% rates despite higher base effects.
Geography tells an important story. “(vii) rural has continued its growth momentum and grew ahead of urban markets,” the brokerage stated, validating the thesis that improved monsoons, healthy crop outlooks, and government rural support schemes are translating to wallet expansion in smaller towns and villages that had been demand deserts.
Margin Relief From Commodity Tailwinds
Profitability across the sector held steady in Q3 despite volume investments and promotional intensity. “Gross/ EBITDA Margins for our coverage universe remained largely flat YoY basis at 52%/25.7% respectively,” Centrum reported.
The forward outlook appears more promising. “(v) RM basket is relatively favourable and gross margins to be in a healthy range,” the brokerage noted from management commentary. Palm oil, copra, wheat, and packaging materials—the key input costs for FMCG companies—have either corrected from peaks or stabilized, providing breathing room for margin expansion if companies choose to hold pricing rather than pass through cost savings.
Hindustan Unilever maintained its EBITDA margin guidance at 22.5-23.5%, signaling confidence that input cost tailwinds won’t be entirely competed away through price reductions or promotional spending.
The Brokerage’s Stock Picks
Centrum identified four top picks based on current positioning and forward catalysts. “Our top picks in the sector are (i) MRCO on account of core business seeing healthy growth (PCO flat volume growth despite sharp price increase+ VAHO seeing a pick-up) and growth businesses seeing good scale up (better execution + inorganic acquisition),” the brokerage stated.
Marico’s ability to hold Parachute volumes despite pricing up and the revival in value-added hair oil (VAHO) category suggests the worst is behind the company. Growth businesses including foods and digital-first brands are scaling, aided by recent acquisitions.
“(ii) BRIT due to – biscuits category being one of the biggest beneficiary of GST rate cut (from 18% to 5%) bringing it on parity with other snacking categories and margins continuing to be in healthy range,” Centrum explained. Britannia trades at premium valuations but the GST tailwind is structural rather than cyclical, potentially supporting sustained volume growth.
“(iii) Nestle owing to pick up in revenue momentum driven by volumes, despite increased competitive intensity in noodles portfolio delivering volume led growth, confectionary & beverage continuing double digit growth, improving outlook for key raw materials and alternate channel performance,” the brokerage added. Nestle’s ability to grow volumes in noodles despite intense competition from ITC and others demonstrates brand strength and distribution reach.
“(iv) HUL based on the re-newed focus on driving volume led growth, sequential pick-up in terms of volumes, recent acquisitions tracking well and EBITDA Margin guidance maintained at 22.5-23.5% levels,” Centrum concluded. Hindustan Unilever’s pivot back to volume-led growth after years of prioritizing premiumization represents a strategic reset that should support market share gains.
The Valuation Reality Check
The challenge for investors is that much of this positive outlook is already reflected in stock prices. Leading FMCG stocks have rallied 15-25% from their 2024 lows as FII flows returned and growth visibility improved. Hindustan Unilever trades at over 50x earnings, Nestle at 60x-plus, and Britannia at 45x-plus—premium multiples that assume sustained execution and leave little room for disappointment.
