Consumer Goods Sector : Conditions ripe for a demand boost By Prabhudas Liladhar Capital Ltd
Conditions ripe for a demand boost
Consumption demand has been erratic for the past couple of years. But the scenario is fast changing and the sector is anticipated to witness a steady recovery in demand led by 1) decline in CPI to 1.6% and negative food inflation, 2) income tax relief worth Rs1trn, 3) cumulative interest rate cut of 100bps in CY25, 4) normal monsoon, and 5) likely reduction in GST rates for specific items during under GST 2.0 reforms.
While 2QFY26 demand will get some boost due to festive stocking. However, timely withdrawal of monsoons is key for demand revival/trade stocking in paints. We don’t rule out some postponement of purchase by consumers in anticipation of rate cuts under GST 2.0. We expect GST rate cuts, transmission of interest rate cuts and normal monsoon to keep the momentum going post Diwali. We expect GST rate cuts to benefit companies in processed foods, stationery and economy segment in footwear. Overall demand will rise across segments as sentiment improves.
We expect gradual uptick in volumes and margins given benign input costs and impact of price hikes taken in earlier quarters. We expect QoQ improvement in growth and profitability during FY26. We remain constructive on the sector as growth revival will drive re-rating of the stocks. ITC, BRIT and TTAN remain the top picks in our coverage universe. We also expect calibrated gains in HUL, MRCO and JUBI.
Favorable macros, GST reforms to drive up demand
Macro conditions seem right for an uptick in consumer demand led by 1) decline in overall inflation to 1.6% and negative food inflation, 2) normal monsoon, 3) benefits of income tax relief worth Rs1trn, and 4) 100bps cumulative cut in interest rates in CY25. In addition, GOI aims to rationalize GST rates under GST 2.0 reforms. The new system is likely to have just two slabs of 5% and 18%, and 40% for luxury and sin goods, as against the current four slabs (5%, 12%, 18%, and 28%, and cess for luxury and sin goods). Everyday consumer goods stand to benefit, with ~99% of items in the 12% slab moving to 5% and large majority of items in the 28% slab moving to 18%. A special 40% slab may remain for luxury and sin goods. The proposal will likely be tabled at the Sep’25 GST Council meeting. We expect this to benefit a select section of consumer goods, assuming that there is no change in classification of various product segments.
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