Consumer Goods Update : Weak Q1; earnings weakness hurts valuation By Emkay Global Financial Services Ltd
The FMCG sector has seen steady de-rating amid weak earnings (Q1 to be 4 th consecutive quarter of muted earnings); forward P/E valuations (at 46x) are now trading below the last 5Y/10Y historical mean P/E (54x/50x). With tailwinds (low tax, liquidity easing, better monsoon, expected easing in select RMs) in place and given the low base, growth recovery ahead would be key. Any disruption that hurts growth recovery would have a bearing on valuations. In Q1FY26E, we see muted earnings across our coverage companies, except Britannia and GCPL. We favor GCPL, MRCO, HMN, and BIKAJI.
Demand stress persists; muted Q1FY26E delivery to be akin to Q4FY25
Overall demand remained stressed as consumer downtrading persisted. FMCG companies have sustained promotional intensity, which is used as a tool in select categories for passing on any RM benefit. FMCG players have effected price hikes in Q1 to manage the inflationary pressure, although realization is unlikely to improve much as increased promotion will reflect in the better volume growth. Volume growth is likely to be similar to that in Q4, with select players seeing moderate improvement and some facing volume pressure. Sales growth is likely to improve modestly across our coverage names, and we see 8% YoY revenue growth in Q1FY26 for our coverage companies. ITC, Marico, and Bikaji are the few that are likely to see double-digit revenue growth.
Margin pressure ongoing; EBITDA and earnings growth to remain muted
Gross margin pressure is likely to persist. Britanni, GCPL, and Dabur would see moderation in gross margin contraction, whereas Marico will see a surge in contraction. Emami and Bikaji are likely to log moderate expansion in YoY gross margin. Barring Britannia, we see EBITDA margin pressure across FMCG companies. Margin pressure is likely to aggravate for HUL, Nestlé, Marico, Emami, and Honasa Consumer. Slow operating leverage and focus on advertising are likely to hurt margin. In terms of EBITDA growth, only Britannia is likely to see a low double-digit growth, with the remaining either clocking moderate growth or a decline YoY. Britannia and GCPL are likely to report relatively better earnings. We see low single-digit earnings growth for ITC, Marico, and Bikaji, with the rest likely to see an earnings decline.
Valuations seek growth recovery and ease in inflation
We believe the need for an uptick in growth and margin is largely not being addressed in Q1. FMCG companies are witnessing a 4 th consecutive quarter of weak earnings delivery. Management commentary would be key for: a) demand, b) commentary on competition which necessitates promotion intensity, and c) inflation. We believe the weak earnings will impact valuations, which have seen support so far. With this report, we roll over our TP to Jun-27E from Mar-26E earlier. We largely maintain our ratings, while revising up our TP for Britannia, Bikaji, Honasa, and Gopal Snacks (Exhibit 64). We continue to favor GCPL, Marico, Emami, Bikaji, Gopal Snacks. We have a SELL on Colgate and Honasa.
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