FMCG is catching investors’ eye ahead of upcoming GST reforms – These are the likely beneficiaries

The Goods and Services Tax (GST) Council will hold its 56th meeting on September 3-4 in New Delhi where it will discuss the recommendations of the GoM, including the shift to a two-rate structure, in line with the government's recommendations.

Centre’s proposed review of the GST rate on key consumer categories has sparked high interest in the FMCG space, with analysts flagging near-term winners in staples. The decision, once implemented, could directly lower prices for items like packaged foods, value-added dairy, personal care products and household consumables, categories that currently sit in the 12% tax slab.

The GST Council is slated to meet early September in New Delhi to discuss the recommendations of the Group of Ministers (GoM) on shifting to a two-rate structure after PM Modi announced major GST reforms on his August 15 address.

GST rate cut - Key beneficiaries

Brokerages believe the biggest beneficiaries could be companies with significant revenue exposure to these categories. Nuvama’s note has pointed out that Bikaji (70% of business at 12% GST), Emami (~60%) and Dabur (24% of India business) stand out as potential beneficiaries. Value-added dairy products like ghee, butter, cheese and flavoured milk are large contributors for Britannia, ITC and Nestle, which could see a boost in demand.

Consumers, Organised Players to Benefit

Nomura expects companies to pass on the benefits of a GST rate cut to consumers, will would lead to lower prices for snacks and personal care products, potentially boosting household savings and supporting a pick-up in demand. According to Nomura, Nestle, ITC and Britannia stand to gain from lower taxes on noodles, pasta, snacks and dairy, while Dabur could benefit in personal care and packaged foods. The GST cut could also accelerate the shift from unorganised to organised players by narrowing the price gap, further strengthening the position of large incumbents.

Ambit and PL Capital in there note have said that while a direct impact for most staples may be modest, indirect benefits could be significant. Lower GST on essentials increases household savings and consumption power, aiding demand recovery. Combined with easing inflation, sops for rural India, rate cut passthrough and festive momentum, FMCG could see a multi-quarter growth acceleration.

Volumes Reviving

Earnings momentum is pointing towards a recovery, with Nuvama expecting HUL to post 6-7% volume growth in Q3FY26, while Britannia, which clocked a nine-quarter high of ~10% revenue growth in Q1, is expected to sustain and even accelerate to double-digit growth in the near term. In oral care, Dabur and HUL are outpacing Colgate, while in soaps, HUL continues to grow faster than Godrej Consumer despite both players grappling with grammage cuts. Margin pressure, which bottomed out in Q1, is likely to ease from Q2 onwards as palm oil, coffee and tea prices cool down, with Marico, Godrej Consumer and Tata Consumer set to see margin rebounds in H2FY26.

Macro Tailwinds & Festive Demand

MOSL has seen the FMCG demand remain stable sequentially, showing gradual improvement. Rural-led recovery has been intact, while urban demand is beginning to gradually pick up. Smaller towns and new-age channels such as e-commerce and quick commerce are driving growth, and consumer companies are stepping up investments in distribution, innovation and portfolio transformation to capture this shift. Realisation-led growth, coupled with a steady uptick in volumes, is expected to accelerate revenues over the coming quarters. Based on these facrors, MOSL has highlighted HUL and Marico as top picks in the FMCG space.

Macro drivers too are supportive, with rural demand underpinned by a strong monsoon and government support, while urban recovery is being aided by easing inflation, rate cuts and income tax rebates announced in the Budget. The upcoming festive season is expected to provide a consumption kicker and analysts expect most companies to deliver steady volume growth and margin expansion from the second half of FY26, with no major price cuts on the horizon.

While the final contours of GST rate changes are awaited, the street believes the potential reprieve offers a sweet spot for consumer staples, boosting both demand and profitability at a time when volumes are recovering and inflationary pressures are easing.

Valuations Picture

The tailwinds come at a time when consumer companies’ valuations have corrected which led to the FMCG index underperforming, down more than 11% over the past one year versus a 2% decline in the benchmark Nifty 50 index. However, as a traditionally high-P/E sector, stocks are still at 48-50 times forward earnings. So do they still make a good investment case?

Market expert Ajay Bagga weighs in, “GST cuts could drive sales growth and EPS upgrades, aided by easing input costs and stronger bank credit, creating a virtuous cycle for consumption and spending. Despite high valuations, FMCG stocks remain well-supported by strong ROIs, zero debt, robust cash flows and dependable earnings, and are poised to benefit from both revenue and margin expansion.”

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