Whalesbook
Domestic Demand Offers a Buffer
International business growth slowed in the quarter due to geopolitical tensions, particularly in the Middle East. However, the Indian market provided a strong counterweight. Dabur India saw high single-digit growth domestically, with home and personal care expanding by more than 15%. Marico India achieved high single-digit volume growth, led by its hair oils and foods segments. Godrej Consumer Products also expects double-digit domestic sales growth. ITC's food and staples businesses reported significant volume gains, including over 17% in edible oils, supported by its extensive distribution network reaching nearly one million outlets. This robust domestic performance, driven by steady rural and urban spending, has been key to the sector's overall results. Yet, a sharp increase in crude and vegetable oil prices late in the quarter signals rising input costs for the first half of FY27. Godrej Consumer noted this could impact costs by 6% to 9% if prices remain high, potentially forcing companies to test their pricing power.
Company Exposure Varies
Companies within India's FMCG sector face different levels of risk from both global events and rising domestic costs. Dabur and Emami, for example, with 6% to 8% of revenue coming from the Middle East and North Africa (MENA) region, are more exposed to geopolitical disruptions. Companies with broader international operations in places like Africa or the US are generally less affected. ITC's wide range of businesses and strong rural network also offer stability against localized issues. Analysts remain positive about India's consumer market due to steady demand. However, awareness of margin risks from inflation is increasing. While many staple food companies are expected to show better revenue growth in the March quarter, with food outperforming personal care, future projections are more reserved. Larger rivals such as Hindustan Unilever and Nestle India, often trading at higher valuations, may handle inflation better due to their scale and pricing power. Marico and Dabur, whose stocks trade at price-to-earnings ratios of 50-60 times, will need to sustain growth to justify these valuations as costs rise.
Growing Margin Pressures and Valuation Risks
Although geopolitical issues have had a limited immediate effect on revenues and margins, and domestic demand is strong, concerns are growing about the full impact of sustained rising input costs. Companies have made small price increases, but a significant jump in raw material expenses could reduce profits if further hikes hurt consumer demand. Godrej Consumer, for example, has warned of a potential 6% to 9% cost increase, which could directly lower operating margins. With many FMCG stocks already trading at high valuations, often over 50 times earnings, there is little room for companies to miss targets. Those with significant Middle East sales, like Dabur and Emami, face a double challenge: possible lower demand overseas and squeezed profits at home. The success of planned price increases is also uncertain, particularly if rivals react differently or if inflation slows overall consumer spending. Past periods of high commodity prices, such as in 2022, showed that prolonged cost inflation can lead to sharp stock price drops and valuation adjustments until cost pressures ease or pricing ability is proven very strong.
The Path Ahead
Companies are preparing for FY27 with cautious optimism, banking on continued domestic demand, smart pricing moves, and strict cost management to handle market swings. Motilal Oswal Financial Services expects margins, which were strong in the March quarter, could weaken in the June quarter as inflation rises. How well companies control input costs and keep consumers buying will be key to their performance. Analysts suggest firms with diverse operations and solid financial health are best placed to handle expected cost pressures and changes in consumer habits.