Right Horizons' Rego Says FMCG Earnings Do Not Justify Current Valuations
India’s fast-moving consumer goods (FMCG) sector, long regarded as a safe harbour during periods of market volatility, is facing an unusual test. With heightened geopolitical uncertainty and a sharp rise in crude-linked inflation, the Nifty FMCG has declined broadly in line with the benchmark indices this year, raising questions about whether its traditional defensive appeal is fading.In this interaction with BW Businessworld, Anil Rego, Founder and CEO of Right Horizons PMS, unpacks the evolving dynamics within the FMCG space from margin pressures driven by crude-linked inflation to uneven demand recovery across rural and urban markets. He also explains why premiumisation remains selective, how competition from regional and private labels is intensifying, and what it will take for the sector to regain its valuation premium in an increasingly discerning market environment.
Edited excerpts:
Nifty FMCG is down 11 per cent YTD, in line with the Nifty 50. Why has the sector failed to act as a defensive play during the recent volatility?
The defensive premium had become elevated over the past few years, limiting upside during risk-off phases. Unlike earlier cycles, FMCG entered this correction with relatively rich valuations but subdued volume growth, making it vulnerable to de-rating.
The sector is facing a margin vs demand trade-off. While defensives typically benefit from stability, the recent crude-led inflation shock has increased input costs (especially packaging and logistics), leading to expected margin compression of 100 to 200 basis points (bps).
Godrej Consumers and Dabur have flagged rising input costs and tepid growth amid subdued demand. How do you see demand recovery?
Companies are constrained in passing on costs due to demand elasticity in mass segments, weakening earnings visibility. Demand recovery has been gradual rather than strong. Although there are early signs of improvement, particularly in rural markets, overall consumption growth remains modest, with recent volume recovery only just beginning after a weak phase. This reduces the sector’s ability to deliver earnings resilience during volatility.
Rural demand was expected to recover in FY26. Are you seeing actual traction on the ground, or is consumption still uneven?
Rural demand is clearly improving, but the recovery remains uneven rather than broad-based. On the positive side, there are visible signs of traction supported by a favourable monsoon, better crop outlook and easing inflation. Management commentary across FMCG companies indicates that rural markets have been growing ahead of urban in the recent quarters, with categories like foods and select personal care witnessing a pickup in volumes.
However, the recovery is not yet uniform or strong enough to drive a full consumption upcycle. Demand remains price-sensitive, especially in mass segments, which limits the ability of companies to take price hikes. Additionally, recent inflationary pressures (particularly crude-linked costs) risk slowing the pace of recovery by impacting purchasing power and delaying volume acceleration.
Urban demand has shown signs of slowdown in recent quarters. What factors are driving this, and how persistent is the trend?
Urban demand slowdown is largely cyclical, driven by inflation-led pressure on disposable incomes and a shift in spending towards essentials, which has resulted in downtrading and weaker volume growth, especially in mass segments. While premium consumption remains relatively resilient, broader urban demand has normalised after the post-covid surge, leading to a K-shaped trend. That said, the slowdown is unlikely to be structural.
Early signs of stabilisation are visible with easing inflation and improving macros, but the recovery is expected to be gradual rather than sharp.
To what extent are companies passing on price hikes versus absorbing costs, and what does that mean for volume growth?
FMCG companies are adopting a calibrated approach to price hikes, typically in the range of mid-to-high single digits, along with measures like grammage reduction, but are not fully passing on costs due to demand sensitivity in mass segments. As a result, part of the cost inflation is being absorbed, leading to near-term margin pressure. This balanced approach helps protect volumes, but growth remains gradual rather than sharp, with volume recovery continuing but still constrained by price elasticity, especially in rural and mass urban categories.
Are premiumisation trends still intact, or are consumers downtrading to lower-priced products amid inflationary pressures?
Premiumisation remains intact, but the trend is more selective and uneven in the current environment. Higher-income urban consumers continue to drive growth in premium categories, supported by innovation and brand-led demand, while at the mass end there is clear evidence of downtrading through smaller packs and value offerings due to inflationary pressures.
Companies are therefore pursuing a dual strategy, premiumisation for margin support and affordability packs to protect volumes, indicating that while the structural premiumisation trend is intact, near-term consumption behaviour remains bifurcated.
How are private labels and regional players impacting market share for listed FMCG companies?
Private labels and regional players are increasingly intensifying competitive pressure, particularly in mass and value segments where price sensitivity is high. Regional brands, with leaner cost structures and sharper pricing, are gaining traction in categories like staples and personal care, while private labels are benefiting from the growth of modern trade and quick commerce. This is leading to gradual market share dilution for large listed FMCG players, especially in commoditised categories, and forcing them to step up investments in pricing, distribution and brand building.
Valuations in FMCG have historically traded at a premium. Do current earnings justify these multiples, or is further de-rating likely?
FMCG valuations remain elevated relative to their growth outlook, and current earnings do not fully justify the historical premium. While the sector offers stability and visibility, growth is only gradually recovering and margins are under near-term pressure from input cost inflation, which limits earnings upgrades.
In this context, the premium multiples are increasingly being questioned, leading to a phase of valuation normalisation rather than outright collapse. Going forward, meaningful re-rating will likely require a sustained pickup in volume growth and margin expansion; until then, the sector may continue to see time correction or mild de-rating.
Within FMCG, which sub-segments—staples, discretionary, personal care, or QSR-linked consumption look more resilient from an investment perspective?
Within FMCG, staples and food categories appear relatively more resilient, supported by steady demand, improving rural traction, and benefits from GST cuts and volume recovery trends. In contrast, personal care is seeing a gradual recovery but remains more sensitive to input cost pressures and competitive intensity, especially in mass segments.
QSR-linked consumption and discretionary pockets are comparatively more vulnerable, given their higher exposure to inflation-led demand slowdown and cost pressures (especially crude and LPG-linked inputs), which can impact both margins and volumes. From an investment perspective, the resilience currently lies in essential consumption-driven categories and selective discretionary consumption pockets.
Pages:
[1]