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2025-10-05 09:19:05 am | Source: Emkay Global Financial Services
Consumer Goods Sector Update : Q2 - GST tailwind; multiple headwinds By Emkay Global Financial Services
Consumer Goods Sector Update : Q2 - GST tailwind; multiple headwinds By Emkay Global Financial Services

Q2: GST tailwind; multiple headwinds

Q2FY26E has a landmark moment for the sector, where government has affected GST rate cut for multiple consumption categories. But limited transition period has affected sector performance in Sep-25. Select companies have offered a handsome promotion to trade to keep inventory afloat (and have a bearing on margin from 3 to 21 Sep), while some have left it to trade to adjust (primary sales impact). We see ~5 days of sales impact across our coverage companies. Additional headwinds were seen in the form of weak seasonality in India, disruptions in Nepal and Indonesia, stability in copra price in Sep, and inflationary trend in palm oil. We see 3% revenue growth for the coverage companies, which with weaker margins is likely to reflect in 1% EBITDA and adj PAT growth in Q2FY26. We expect Q3FY26 to be better, given primary sales visibility and a low base. We maintain our stock calls, with preference for Godrej Consumer, Marico, Bikaji, and Emami.

 

Shift in sales from Q2 to Q3, amid primary sales disruption

FMCG sector has seen an enabler in the form of GST rate cut, which is likely to fuel consumer wallet, where companies with better execution are likely to benefit. While the outlook turns positive for the sector, in the short term, we have seen trade challenge disruptions, given wider fragmented distribution set-up. While select players have tried to support trade to keep it afloat, most of our coverage companies are likely to see five days of sales impact, where primary is expected in Q3. From topline perspective, Marico is likely to post 23% growth, where healthy pricing in Parachute and edible oil could help. Honasa and Bikaji are likely to follow with mid-teen growth. Colgate, Emami, and Gopal are likely to see mid to low double-digit revenue decline.

 

Weak topline hurts operating leverages, resulting in lower profit growth

Profitability in Q2 is likely to be impacted, given primary sales were lower and part sales in Sep’25 took place through higher promotions. Additionally, unlike our expectations, copra prices have remained firm in Sep at elevated levels and palm oil prices have seen inflation of ~9% from Jun lows (though they remain flat QoQ). Additionally, lower sales are likely to hurt margin and profit growth in Q2. Barring Bikaji (12% EBITDA growth in Q2), we see EBITDA growth lagging revenue growth for most.

 

Valuation pricing enhanced outlook; execution key to benefit from tailwind

FMCG sector forward P/E valuation at 55x is now trading near 52x/57x last five/ten years average forward P/E. Given the shift of Q2 sales to Q3, we expect valuations to await growth guidance. The management commentary in Q2 turned crucial, with execution update as key to enhancing growth outlook. In our coverage, we continue to see players with better execution delivering better, and our preference is GCPL, Marico, and Bikaji. We are positive on Emami (weak seasonality a headwind) and Gopal Snacks (delay in Modasa commissioning), but see near-term headwinds to have a bearing on valuations.

 

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