A revival in urban demand in the June quarter (Q1FY26) has brought relief to fast-moving consumer goods (FMCG) companies after months of a slowdown. But the pain is not over yet for firms as margins continue to be under pressure amid inflation in select commodities such as copra, palm oil and wheat. Firms have also stayed away from taking sharp price hikes to mitigate input cost pressures. This has been done to minimise impact on volume growth, top executives and analysts said, as demand conditions improve in FMCG.
A look at the earnings before interest tax depreciation and amortisation (Ebitda) margins reported by most firms in Q1 shows a decline of around 100-430 basis points during the period. At the same time, companies have seen a volume growth of about 4-9% in Q1, while price-led growth has been around 2-4% only. One basis point is one-hundredth of a percentage point.
Input Costs Still High, Price Hikes Limited
The decline in margins come as commodities such as copra, palm oil and wheat have seen inflation of about 7 to 47% in the last three months, data sourced from Bloomberg shows. Tea, coffee and sugar prices have declined during the period, after sharp volatility seen earlier. Copra goes into making hair oils, palm oil is used in soaps, detergents and personal care items such as shampoos, while wheat goes into products such as biscuits and noodles.
“We expect commodities to be range-bound. Hence, we expect that going forward, our pricing will be in low single digits,” Ritesh Tiwari, chief financial officer (CFO), Hindustan Unilever (HUL), said during the company’s June-quarter results last week.
“Palm oil prices have begun moderating towards the end of June. The benefits of this moderation will be visible in the second half of FY26,” Aasif Malbari, global CFO and president for Middle East, Africa and International Markets, Godrej Consumer (GCPL), said.
Volume Growth to Drive Future Margins
Firms such as Britannia say that they are almost done with the cycle of price hikes they had undertaken over the last few quarters.
“FY25 was a difficult period from a commodity inflation perspective,” Varun Berry, vice-chairman, MD and CEO of Britannia Industries, said in an investor call this week. “But in the current fiscal, commodities are likely to be stable. The phase of volatility is behind us. And we tend to do well in stable conditions. We are in a good position,” he told investors.
While Britannia’s volume growth was 2% in Q1 and price-led growth was 6% as the company had taken price hikes of about 4-6% in the June quarter, volume growth, Berry said, would steadily improve in the coming quarters of FY26 as price hikes abate.
Tata Consumer, meanwhile, is hopeful that tea prices will continue to head downwards as the tea crop is expected to be normal this year.
“Margins (in Q1) were impacted because tea prices were not fully passed on to the consumer. Current forecasts point to a normal tea crop. Tea prices therefore will normalise. It will not show the volatility that it has in the past. This will aid margins ahead,” Sunil D’Souza, MD & CEO, Tata Consumer, said.