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1QFY26 Review: Mixed bag; festive season trends will be key

For our Staples (ex-ITC) coverage universe, 1QFY26 sales growth (+7% yoy) was inline while EBITDA (-2% yoy) was tad below our est. If we double click on the construct across companies, there were a few HITS (Marico, Honasa, Bikaji) and MISSES (c.3-7% miss on EBITDA for GCPL, TCPL, Nestle, Britannia, Colgate). Volume growth across Staples players (baring Colgate, Britannia) improved (vs. recent quarters); however, GM delivery lagged expectations owing to consumption of high cost inventory & lack of commensurate price hikes. Management commentaries point to optimism with some signs of recovery in urban, rural remaining resilient and expectations of festive-led demand uptick going ahead. This is also visible from our & street estimates for balance 9M (building uptick in sales and much higher growth in EBITDA vs. 1QFY26 trajectory). Sector valuation (NTM PE of c.54x) is above 10-year average, thereby limiting headroom for error. Commentaries on festive demand/exit trends for Q2 & margin recovery would be the critical future forecast drivers. Prefer Britannia, GCPL, VBL, Marico, Bikaji, DOMS within our coverage universe.

* Volume growth sees improvement while GM weakness led to miss on EBITDA for most of the companies: Volume growth for most companies (barring Colgate/Britannia) in our Staples coverage universe saw improvement vs recent quarter, pointing towards gradual recovery. Rural markets continued to grow ahead of urban. Price/mix led growth remained similar to 4Q – price cuts were seen in certain categories (Detergents/HI), price hikes were taken in CNO (due to elevated copra price) and carry forward pricing growth continued for Foods players. Input costs inflation and consumption of high cost inventory resulted in yoy/qoq compression in gross margins for the Staples players. Impact of the same was partially offset through calibration of A&P spends (as a % to sales saw moderation both on YoY & QoQ basis) and tight control over overhead costs. Within our coverage universe, ITC-Cig, Marico, HUL surprised positively on volume growth while Colgate, Britannia, Dabur were a miss. On EBITDA - TCPL, Nestle, GCPL, Britannia, Colgate surprised negatively with EBITDA miss of c.3-7% while VBL & Honasa were key positive surprises, despite impact of weak summers in their core categories.

* What has street done to estimates & how do we see balance 9M shaping up? 1QFY26 sales growth of c.7% for Staples (ex-ITC/VBL) saw improvement vs. c.5% growth seen in recent quarters. We expect gradual recovery in performance both on sales & profitability with 2HFY26E performance being better vs. 1HFY26E led by improving macro (gradual recovery in urban, normal monsoons, easing interest rate), upcoming festive season and weak base. Consensus est. for FY26 suggests that the street is factoring in high-singledigit revenue growth for balance 9M of FY26E for Staples (ex-ITC/VBL) coverage universe led by mid-high single-digit volume growth. Going ahead, for balance 9M, we expect Marico to sustain its c.20%+ growth trajectory, followed by c.15-17% sales growth for Honasa & Bikaji. For Dabur, Britannia, TCPL & GCPL, we bake in c.9-10% sales growth & for HUL, Nestle, Jyothy Labs & Colgate, we expect sales growth to be relatively lower at c.4-6% for balance 9M of FY26E. On margin front, we expect healthy recovery – function of easing RM prices, favorable base (from 2Q) and scale leverage. This should prevent further margin compression with yoy EBITDA growth likely to improve from Q2 onwards. We expect EBITDA growth over next three quarters to surpass sales growth for Staples coverage companies except HUL (focused on accelerating growth in the near-term), Marico (prolonged inflation in copra prices) & Jyothy Labs (high promotional intensity).

* Initial take on possible GST reforms: Media reports suggest government is looking for rationalisation of GST rates featuring two main slabs: 5% & 18%. Currently, most of the HPC items (including daily essentials like Detergents/Toothpaste/Soaps) fall in the 18% slab. Within 12%, we have packaged Namkeens, Bhujia, Fruit Juices, Instant Noodles, Ketchup, Dairy items (Ghee, Butter, Cheese, Milk Beverages) and Stationery items (Pencil, Crayons, Notebooks). Abolishing the 12% slab & moving these items to 5% will benefit Bikaji, Nestle, Dabur and DOMS. Also, stance on certain daily essentials in Staples (which are at 18% now) will be key & reduction there could be positive for HPC players too.

* Competitive intensity remains largely unchanged: In terms of demand trends, titration in usage was seen (highlighted by Marico/Colgate). Another trend seen by many companies was premium portfolio growing ahead of mass, this momentum is expected to continue. Within Staples, this was alluded to by Marico (recovery in VAHO), HUL (B&W, premium Hair Care), Jyothy Labs (Liquid Detergents/Dishwash, LV), GCPL (LV) and Dabur (Oral Care, Hair Care). This apart, competitive activity remained intense in certain Staples segments – as is evident from increased promotional intensity seen in Oral Care, Dishwash, Soaps, and Juices. On the discretionary front, alcoholic beverages sustained strong outperformance in the premium segment.

* Valuations above 10-year average after recent run up, acceleration in sales growth will be key as headroom for error is limited: FMCG NTM PE (ex-ITC) had touched a peak of c.68x (c.8% higher than +1SD) in mid-September. Post the abysmal 2Q/3QFY25 delivery and cautious outlook for the near term, valuations corrected to c.50x (below 10-yr avg) in Feb’25. Better narrative (normal monsoons, rural recovery) and moderating input costs inflation (benign crude, stable palm oil) point to improving sentiments. NTM PE is now at c.54x, higher vs. 10-yr avg., though at -1SD 5-yr avg. With street factoring healthy sales & earnings recovery in FY26/27E, headroom for error seems limited at current valuations.

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