“While we expect some drag for a few manufacturers of a summer range, we are optimistic about demand recovering,” Anand Rathi said, adding that “most FMCG managements were upbeat about greater volume growth in FY26, aided by strong rural demand & urban demand recovering.”
In the discretionary space, the brokerage said United Breweries is its preferred pick, buoyed by premiumisation-led growth.
The brokerage has set target prices of Rs 2,840 for HUL, Rs 1,430 for Godrej Consumer, Rs 840 for Emami, Rs 2,570 for Zydus Wellness and Rs 1,875 for Mrs Bector Food. For United Breweries, the target is Rs 2,610.
Rural demand leads recovery
Citing Nielsen data, Anand Rathi noted that rural volumes grew 8.4% year-on-year in Q4, nearly four times the 2.6% urban growth. Value growth in the sector stood at 10.7%, with a notable increase in unit sales indicating a shift toward smaller packs, a sign of evolving consumer preferences amid inflationary pressures.
“Most companies are seeing stronger rural traction, while urban demand is muted, but gradual recovery is expected in coming quarters,” the brokerage said.
Margin pressures ease as input costs soften
The near-term drag on margins from commodities like tea, coffee, and cocoa is expected to fade as key input costs such as palm oil, wheat and crude oil have fallen 12–18% in recent months. Price hikes in H2FY25 and early FY26 are also expected to cushion profitability.
“We, therefore, build in a 100bp EBITDA-margin gain over FY25–27,” Anand Rathi said.
Q4 margins for staples declined 140bps year-on-year, while discretionary companies like United Spirits and Radico Khaitan delivered margin expansions. The brokerage projected a 160bps EBITDA margin increase for alcoholic beverage companies in FY26 and a 50bps improvement for FMCG staples.
Company commentaries show confidence in FY26
Despite patchy urban demand, FMCG companies remain optimistic. HUL noted gains in premium brands like Dove and Pears and continues to increase market share through volume-led growth. Godrej Consumer said it expects “strong standalone volume (mid to high single digit) and consolidated revenue growth, double-digit EBITDA gains, and faster PAT growth aided by a 400bp tax-rate drop.”
Marico pointed to “more than 95% of the portfolio gaining or maintaining market share,” while Britannia cited strong traction in traditional retail, especially for its revamped cake portfolio. Zydus Wellness saw strong gross margin expansion and expects PAT to grow at over 20% CAGR till FY27.
Dabur gained market share across 90% of its portfolio and sees double-digit or high-single-digit value growth, supported by modern trade and e-commerce channels.
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Discretionary plays ride premiumisation wave
United Breweries, Anand Rathi’s top discretionary pick, is forecast to post 35.1% earnings CAGR over FY25–27. The company reported premium brand growth in Kingfisher Ultra, Ultra Max and Heineken Silver, despite policy and pricing disruptions in key markets like Karnataka and Telangana.
Radico Khaitan grew its market share from 10% in H1 to 23% in Q4 in Andhra Pradesh following route-to-market changes and expects input cost stability in FY26. United Spirits remains focused on maintaining its 17% margin and expects headline pricing growth of 4–5%.
Valuation rerating done; earnings will drive returns
FMCG stocks have rebounded 5–20% over the past three months, driven by improving demand sentiment and falling input costs. The exception has been Dabur and Colgate, which have remained flat.
Anand Rathi said it believes valuations have normalised and future returns will depend on earnings delivery. “Returns will now be linked to earnings and potential surprises arising from demand recovery or a sharp fall in input costs,” the brokerage said.
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With sector revenue expected to grow at about 9% CAGR and earnings at about 14% over FY25–27, the brokerage remains constructive, particularly on companies with strong rural exposure and premium product strategies.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)
