Over with GST transition pain, FMCG cos now eye a long-term recovery

GST 2.0 was expected to boost consumption, as consumers waited for price cuts to kick in from September. The Street widely expected people to shift to premium products or from unbranded consumer goods to branded ones. While price cuts did boost sales of a few larger electronic products or cars, the wider consumer sector still awaits a trickle-down effect.

India implemented major GST reforms just ahead of the quarter, cutting rates on over 375 items to boost consumption, with 90% of the items in the 28% tax slab moving to 18%, and most items with 12% going to 5%.

In the short-term, the tax rate cuts have brought more difficulties for consumer giants, than a helping hand.

Revenue growth for FMCG companies ranged from a minimum of 2-6% to a higher end of 27% during the December quarter.

Transition turbulence

Anil Kumar, chief executive officer of Redseer Strategy Consultants, said despite GST cuts, particularly on FMCG categories where rates moved from 18% to 5%, consumption has not meaningfully picked up, especially among middle class buyers. The absolute savings were too small to materially change consumer behaviour, he explained.

“There was a bit of disruption when GST rates changed,” Sunil D’Souza, managing director and CEO of Tata Consumer Products, told Mint in an interview last month.

“But I remain in the same camp that just because the GST rates changed in September-October doesn’t mean overnight demand is going to change, especially for staples and FMCG,” he said.

The cut in indirect tax rates has also affected the margin profile of various companies. Take the case of Colgate Palmolive. Almost 90% of its products were affected by the GST cut, and its Ebitda margin came in at 30% for the quarter, lower than 31.1% a year ago.

Optimism ahead

There is, however, optimism for the coming quarters, with FMCG chief executives hopeful that benefits will flow in over the longer term.

Marico said easing prices and GST-led affordability should gradually support demand recovery. “Easing absolute consumer prices will support a gradual recovery in volume growth in the coming quarters,” Saugata Gupta, managing director and CEO said, adding that this would be aided by “structural tailwinds from the recent GST rate rationalization, which has driven affordability.”

He described the tax reform as a long-term positive, saying, “Structurally, in the medium term, GST is transformative. It will definitely give added growth to all the brands, especially in categories which have seen a significant GST cut.” Referring to personal care, he noted these are “categories, which have moved from 18% to 5%, which means a significant reduction and driving affordability.”

In foods, Gupta highlighted the shift toward branded offerings, saying, “Packaged food is hygienic, packaged food is aspirational.” He remains confident of sustaining a double-digit growth trajectory. Marico reported a 234 bps year-on-year decline in Ebitda margin to 16.7% due to input cost pressures.

Rakshit Hargave, CEO of Britannia Ltd noted in the company’s Q3 analyst call that demand was stable, but temporarily affected by the GST transition. October “was a transition month where we saw a bit of a dip,” Hargave said, clarifying that in November and December, he does not think there was “any impact of channel filling, this is routine business based on sellout and consumption”.

He added that the company’s 9.5% revenue growth was “a mix of volume and higher value realization because of the GST difference,” calling it “about half-half.” Britannia passed tax benefits to customers by increasing grammage at key ₹5 and ₹10 price points and was “first off the block, moving to ₹10 and ₹5 with more biscuits.” However, since all companies have not fully moved towards the ₹10 and ₹5 price points, the market remains “still in a bit of flux” with dual pricing on packs creating confusion, he said.

Despite the disruptions, Hargave termed the GST reduction as “a very good move” and said the company is “extremely confident that in the medium- to long-term, this will be very beneficial to consumers.”

Sales watch

Volume growth was a mixed bag for companies in the sector. It ranged from 3% to mid-teens for the reporting quarter.

“India branded business posted underlying volume growth of 15%,” said D’Souza, of Tata Consumer Products in the Q3 FY26 earnings call. Dabur also reported a healthy volume-led growth across its key business verticals and geographies.

ITC’s volumes will be a key monitorable in the coming quarters, as excise duty hikes of cigarettes could affect demand, according to analysts tracking the company. This volume growth has pushed up revenues in the quarter.

Mohit Malhotra, Dabur CEO, said demand trends in India witnessed “a gradual recovery” following the GST rate cuts, although October saw “transient headwinds” due to the GST transition.

He maintained that the GST rate cuts are helping consumer sentiment and should aid performance across the food, over-the-counter and personal care categories, even as beverage and glucose remain seasonally-dependent.

Rural market & quick commerce

Growth in the rural markets remained a major lever for FMCG giants. Companies including HUL and Dabur said growth in the rural market outpaced urban. “Rural, which was not performing… we are seeing some growth coming in from rural areas,” said Mohan Goenka, vice-chairman of Emami Ltd.

Malhotra of Dabur said rural markets continued to outperform the urban markets, but the gap had narrowed, with rural now outpacing urban by around 300 basis points, nearly half of last year’s differential, as “urban performance is kind of inching up”.

Most companies have doubled down on the quick commerce portfolio in the urban markets. Emami reported that sales from quick commerce doubled during the quarter and now contributes 20% to its e-commerce business. Tata Consumer reported a similar doubling in the quick commerce sector, while HUL set up a dedicated organization to handle its quick commerce operations.

HUL’s net profit before exceptional items rose 1% year-on-year during the quarter. while Nestle’s profit jumped the highest by 45%.

Price hikes and outlook

Despite GST transition issues, higher costs and a one-time labour law provision, Dabur reported an operating profit and PAT growth ahead of topline growth, driven by calibrated price increases and cost efficiencies, alongside high double-digit growth in perfumed hair oils.

The implementation of the country’s new labour codes has had a significant impact on the bottomline of companies during the quarter. The new codes mandate wages accounting for at least 50% of the remuneration, a higher gratuity and other statutory payouts, such as provident fund.

Companies have also started taking price hikes.

Some price increases have already been taken, said Niranjan Gupta, chief financial officer at Hindustan Unilever Ltd. “Some are in the offing that may happen soon, but we continue to calibrate our price increases as the input cost moves,” he added. HUL’s recent price hikes were on detergents that were not affected by the GST rate cuts.

While companies indicate a better outlook for FY27, inflation could play spoilsport, as it has been inching up over the quarter with the headline retail print at its highest in eight months in January.