RBI's inflation caution may halt FMCG rally

The Reserve Bank of India’s (RBI’s) caution on inflation, highlighted during the recent monetary policy meeting, may put investors’ faith in fast moving consumer goods (FMCG) stocks to test, analysts said.

They, however, believe FMCG stocks may ride through this near-term investor anxiety as related companies are, typically, well-equipped to handle inflation due to their pricing power and steady demand for essential goods.

They suggest investors use any near-term dips to accumulate quality stocks for the long term.

“The RBI’s recent comments on inflation could prompt caution around FMCG stocks due to potential pressure on profit margins from rising input costs.

"That said, despite the short-term corrections, the sector remains a defensive play due to its stable cash flows and resilience,” said Nirav Karkera, head of research at Fisdom.

On Wednesday, RBI Governor Shaktikanta Das pointed out that core inflation, which excludes food and fuel prices, was on an uptrend in July and August even as headline consumer price index (CPI) inflation decreased during this period.

Consequently, the Nifty FMCG index has fallen 2 per cent in two days.

By comparison, the benchmark Nifty 50 index has slipped barely 0.05 per cent during the period. Over the past six months, the index has jumped 14.3 per cent as compared to a 9.8 per cent surge in the Nifty 50 index.

Inflation ticking up

Economists expect India’s retail inflation to come above the RBI’s 4 per cent medium-term target in Sep­tember, for the first time since July, due to a persistent rise in vegetable prices and a lower year-ago base.

Food items, especially vegeta­bles, which account for a significant share of the overall inflation basket, saw an uptick in prices last month on the back of heavy rains reducing the availability of essential crops.

A Reuters poll of 48 economists, thus, forecasts retail inflation to jump to 5.04 per cent for the month, up from 3.65 per cent recorded in August and 3.54 per cent in July.

The RBI, on its part, has trimmed Q2FY25 CPI estimate to 4.1 per cent from 4.4 per cent; raised Q3FY25 CPI estimate to 4.8 per cent from 4.7 per cent; and cut Q4FY25 inflation estimate to 4.2 per cent from 4.3 per cent.

Overall, it has maintained the CPI projection of 4.5 per cent for FY25.

“While Q2FY25 results of FMCG companies may see benefit of lower crude oil and other raw material prices, investors, alike RBI, will watch input cost trends in Q3FY25, which has seen a volatile start for crude oil prices,” said Siddhartha Khemka, head of retail research, Motilal Oswal Financial Services.

Crude oil prices not only affect consumption-related companies that use oil derivatives as their raw material, they also have a bearing on the overall inflation due to higher transportation and logistics costs.

“While the RBI may be concerned about this, any likely input price rise may be offset by festive and wedding-led demand in Q3FY25.

"FMCG companies may also absorb higher costs to maintain volume growth,” Khemka added.

Demand holds key

According to VK Vijayakumar, chief investment strategist at Geojit Financial Services, the real concern affecting the FMCG sector is that it is “yet to revive significantly”.

“This year’s good monsoon and better agricultural output, however, augur well for rural demand and the FMCG segment.

"Near-term inflationary concerns are mainly due to the base effect,” he added.

Overall, analysts expect FMCG companies to experience a recovery in volume growth during the September quarter.

Revenue gro­wth, they said, will primarily be driven by volume growth in the low to mid-single digits, led by improved rural sentiments.

“Companies with higher share of rural distribution, alongside those expanding their geographical footprints, are expected to outperform their FMCG peers.

"Considering these factors, we anticipate HUL, Nestle, Jyothy Labs, and Varun Beverages to lead the overall revenue growth for the sector in Q2,” said a note by Axis Securities.