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FMCG companies are currently navigating a tough business environment. They are dealing with rising competition from smaller regional brands and new-age direct-to-consumer (D2C) companies, according to a report by Axis Securities.
The report added that on top of that, there is pressure to clear old stock in traditional retail shops, which is adding to their challenges. It said, "The operating environment remains challenging, as companies face stiff competition from regional players, the increasing presence of D2C brands, and inventory liquidation pressures in general trade channels". Despite these issues, the report added that the beverage companies are expected to perform well this season. The summer heat is boosting the demand for carbonated soft drinks, which is likely to support strong sales growth in this segment. However, for most FMCG companies, overall volume growth is expected to remain weak, continuing the trend seen in the October-December quarter of FY25. Interestingly, rural areas are doing better than urban markets, where consumer demand is still slow. This rural strength is helping to balance out the overall performance to some extent. The report said "Volume growth for FMCG companies under coverage is expected to remain soft, continuing the trend seen in Q3FY25". At the same time, the cost of raw materials like palm oil, coffee, wheat, and cocoa has gone up. This rise in input costs is pushing companies to increase the prices of their products. These price hikes are expected to support revenue growth, but the full benefit may take time to show up. Looking ahead, there are some positives that could support demand in the coming months. Interest rate cut, a good monsoon, and government measures to increase disposable incomes may help boost consumer sentiment. This could lead to a demand recovery in the second half of FY26. Still, profit margins are under pressure. The high cost of raw materials is making it harder for companies to maintain healthy gross margins. Even though many firms have raised prices, the gains from these hikes are expected to be delayed. As a result, EBITDA margins may shrink due to poor operating leverage and weak gross margins. To manage this, some companies are cutting back on their advertisement spending. In short, while FMCG companies are facing multiple challenges, smart pricing strategies, rural demand, and seasonal factors may help them stay afloat until broader market recovery kicks in. (ANI)
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