HDFC Securities expects 12% revenue growth for the FMCG sector in Q2, but warns that raw material costs are hurting profits. The brokerage notes a sector-wide valuation correction, with traditional business advantages facing intense competition. Investors are tracking how these companies manage costs versus top-line expansion.
The fast-moving consumer goods sector is facing a disconnect between revenue growth and actual profit delivery, according to a recent report by HDFC Securities. While analysts project a 12% increase in year-on-year revenue for the second quarter, the report highlights that rising raw material costs continue to pressure profit margins. This trend suggests that while consumers may be buying more or companies are successfully implementing price hikes, these gains are being offset by inflationary costs in the supply chain.
This dynamic has led to a broader valuation correction across the industry. Traditionally, large FMCG companies were valued highly for their deep distribution networks and legacy brands—often described as business moats. However, the brokerage firm notes that these advantages are weakening. The rise of digital-first competitors and more agile, smaller players is forcing a re-evaluation of how much premium investors should pay for established FMCG stocks.
Performance expectations remain uneven across the sector. The report notes that companies such as ITC, Bikaji, and Gopal Snacks are expected to see earnings declines compared to the previous year. Conversely, industry heavyweights like Hindustan Unilever, Dabur, and Emami are projected to report single-digit earnings growth.
To navigate this environment, the brokerage is prioritizing companies that demonstrate superior execution and adaptability to modern consumer trends. Their preferred list includes Godrej Consumer Products, Britannia, Emami, Honasa Consumer, and Bikaji. In a notable shift, Nestle India has been upgraded to a Buy rating, as the brokerage believes the stock's valuation has become more reasonable following the recent sector-wide price adjustments.
Looking ahead, the market is adjusting its expectations, with target prices for the coverage list now rolled forward to September 2027. Investors tracking the sector may want to monitor whether companies can effectively manage input costs in the coming quarters. The primary risk remains persistent commodity inflation, which could continue to weigh on bottom-line performance if companies are unable to pass these costs on to consumers without losing market share to smaller, faster-moving competitors.