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Informist, Monday, Dec. 29, 2025

 

By Simran Rede

 

MUMBAI – Cuts in goods and services tax have failed to cheer up stocks of fast-moving consumer goods companies. Even after the government reduced GST rates on most daily-use products, shares of FMCG companies continued their downward journey and brushed aside what was seen as a fundamentally positive trigger. 

 

The Nifty FMCG fell nearly 3% since the GST rate cuts were announced even as the benchmark Nifty 50 index has risen 6% in the same period. The Nifty FMCG index had rallied almost 4% in August on the hope of tax relief till the GST council announced the revised rates on Sept. 3. 

 

Those gains have been erased. The Nifty FMCG is now marginally down since Prime Minister Modi in his address to the nation on Aug. 15 announced that GST rates would be cut. Although the fall in the index seems modest, most FMCG analysts believe the reforms fall short of what would be needed for any "drastic" or substantial growth in the industry.

 

The tax body lowered GST on several food and some drink products, including savoury snacks, cakes, pasta, cheese, noodles, chocolate, coffee, juices and also on daily-use products such as soap, shampoo, and toothpaste. GST on biscuits and cakes was cut to 5% from 18%, on cheese was reduced to 5% from 12% and that on toothpaste and toothbrush was cut to 5% from 18%. 

 

Still, while the benchmark Nifty 50 index rose over 6% since the announcement of reductions in GST rates, the Nifty FMCG index has fallen 3%. Similarly, after the new rates came into effect from Sept. 22, the 50-stock index advanced 3% while the Nifty FMCG fell more than 2%, moving in contrast with the overall market. 

 

VALUATIONS

Stocks of FMCG companies continue to be highly valued around 50 times the price-to-earnings ratio for 2027-28 (Apr-Mar), an FMCG analyst at a domestic brokerage said. The Nifty FMCG index has been moving in a range of 54000 points-57500 points for more than six months and technical analysts expect the index to continue this movement until it breaks either side of its range.  

 

Despite high valuations, analysts do not expect a correction in stock prices given their strong fundamentals. "There will be correction only if volume growth stays muted even after such a good macroeconomic environment", an FMCG analyst said. Currently, there is not enough clarity on the earnings growth of the sector and there is a need to wait and watch how fast the growth will be in the December quarter, he said. "Only after we get the Q3 numbers will we be able to see if any re-rating is required or not," he said.

 

After lowering the GST rates on most FMCG products, the October sales were impacted due to disruption in trade and an increase in channel inventory. This disruption is expected to have settled in November and the sales are seen to pick up pace following this, the analyst said. Some analysts also believe that the November sales of some companies were partly impacted due to the GST-led trade disruptions while for most companies the impact was concentrated in October. The volume growth in the December quarter is expected to be in high-single to double digits, he said. The value growth is seen moving hand-in-hand with the volume growth for the quarter, he said.

 

The December quarter earnings are likely to show some impact of trade destocking and trade disruption following the goods and services tax rate cut, analysts said. "For that reason, I do not think there will be a big boost that we will see as far as the consumer sector top-line growth or demand growth is concerned, at least in the third quarter. So, growth, I think in the second quarter, 200 to 400 basis points worth of growth was impacted", a sector analyst at Systematix Shares and Stocks (India) Ltd. said.

 

GST CUT vs VOLUME GROWTH

On Sept. 22, the long-awaited "GST 2.0" reforms were implemented, slashing rates on most regular-use FMCG products from 12% to a merit rate of 5%. The dual tax bonanzas in the form of income tax cut announced in the Budget for FY26 and the recent sweeping goods and services tax reforms will lead to savings of over INR 2.50 trillion annually, Prime Minister Narendra Modi had said in September, calling the then upcoming festival season a "Bachat Utsav".

 

This should have been the "bazooka" required to boost volume growth. However, as we move through the December quarter, these reforms paint a not very rosy picture. While the new rates have provided a sentiment cushion, they are insufficient to drive a drastic volume recovery in the current financial year, according to FMCG analysts. The push for volume growth of FMCG companies is expected to be gradual rather than a sudden boom, as the usual industrial headwinds continue to play a major role.   

 

Although lower taxes helped demand recover in the quarter, the pickup in the pace was lower than expected. Prolonged weak demand for FMCG goods in urban areas is expected to continue in the December quarter, with projections of low- to mid-single digit growth. While higher disposable incomes will benefit urban areas and tier 2 and tier 3 markets, the sector faces persistent headwinds from competition posed by regional and direct-to-consumer brands, monsoon risks, and structural e-commerce shifts. High competition for companies in urban areas from regional players with a turnover of less than INR 1 billion continues to impact the growth in demand in urban areas, said Onkar Kelji, research analyst at Indsec Securities & Finance Ltd. 

 

These small players are growing much faster than large established companies and are gaining market share regionally, he said. The small entities have dominated the region and are not expanding their coverage across the country. Rural consumption has made a strong comeback, along with the premiumisation trend visible in urban markets helping improve the demand scenario, analysts said.

 

While the rural economy is expected to reap the benefits of a strong monsoon, which will improve affordability and drive faster volume growth, demand from urban consumers is also expected to see a cyclical recovery, an analyst at another domestic brokerage said. This will lead to a comeback of overall volume to mid-single-digit or higher percentage growth, after four years of growth in low single digit, he said.

 

STRUCTURAL BOOST

The government has tried its best to improve consumption growth. The reduction in indirect tax, changes in income tax slabs by making income up to 1.2 million rupees a year tax free, and benign inflation have provided some support to the FMCG companies. However, analysts believe this is not enough for a significant growth of the industry. 

 

Key concerns that have impacted volume growth over the past four years - high inflation and low wage growth - which, in turn, impacted affordability and reduction in mass consumption. While inflation levels have eased, outlook on real rural wage growth and employment levels continue to be weak, analysts said. Until corporate earnings improve and the wage growth in the country rises, analysts do not expect foreign institutional investors to return to their buying mode in India, where the focus is expected to be on FMCG stocks, according to analysts.

 

In October, India's retail inflation fell to a record low of 0.25% and this was expected to cushion consumer expenditure. The central and state governments need to implement several structural reforms to drive the country's growth further over the coming years, Kotak Institutional Equities said in a report. Lower goods and services taxes and interest rate cuts will provide only a short-term boost to consumption, which may last only a few quarters, it said. "... but structural reforms will be critical to push India's growth to a higher level and leverage India's favourable demographics," according to the brokerage.  End

 

Edited by Deepshikha Bhardwaj

 

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