Is Rural India Powering the FMCG Comeback? Windmill Capital

As part of our smallcase rebalance reading this month, we analysed sector-level trends better to understand evolving risks and opportunities for our portfolios. This article examines India’s FMCG sector performance in Q4 FY25, a quarter marked by rural resilience, urban softness, and recalibrated strategies as companies balanced margin pressures with long-term bets on premiumisation, digital, and category expansion.

India’s fast-moving consumer goods (FMCG) sector ended FY25 on a cautiously optimistic note. While signs of rural recovery became more visible, urban demand continued to lag, especially in discretionary categories. For many FMCG players, this quarter was less about chasing topline growth and more about course-correcting: balancing cost pressures, fine-tuning pricing levers, and rethinking portfolios to stay aligned with changing consumer behaviours.

This article presents a factual overview based on publicly available data and is intended for general informational purposes only.

Rural Gathers Pace, Urban Still Catching Up

A key narrative this quarter was the relative strength of rural demand. Dabur reported rural growth outpacing urban by 450 bps, while Jyothy Labs echoed similar trends. However, urban segments, especially mass and mid-tier discretionary categories, remained sluggish. HUL’s personal care portfolio and Colgate’s mass brands reflected this muted sentiment.

Volume growth across the board remained moderate:

HUL: ~2% underlying volume growth
Jyothy Labs: 4% in Q4 (down from 8% in Q3)
Britannia: ~3.5%
Nestle: 4.2% domestic sales growth — below its 8-quarter average

Pricing & Promotions: Targeted Over Tactical

Price hikes were measured and selective, with most companies choosing to lean on promotions over aggressive pricing to retain market share.

Dabur implemented 3–4% price increases to offset inflation
Colgate relied on promotional pushes as part of its premiumization strategy, which diluted pricing power despite stable raw material prices

Margins: Input Costs Still Bite

Input inflation, while off its peak, continued to squeeze profitability. Commodities like cocoa, palm oil, and tea remained elevated.

Britannia faced steep margin pressure due to cocoa (+83%) and palm oil (+54%) inflation
Tata Consumer took a 25% EBIT hit in its branded tea business
HUL reported a 90 bps YoY dip in gross margins

A few companies bucked the trend:

Colgate improved gross margins by 130 bps YoY via strong cost controls
Nestle maintained steady margins despite muted growth, supported by operational efficiencies

Category Check: Essentials Hold Steady, Premium Lags

Essentials-led categories outperformed, while discretionary ones dragged.

ITC’s Agri Business delivered strong EBIT growth (+26% YoY), though its FMCG arm grappled with input cost pressure
Varun Beverages saw 15.5% volume growth and 23% EBITDA growth in India, driven by mix optimisation and operating leverage

On the flip side:

HUL’s Beauty & Wellbeing saw modest gains
Colgate’s premium launches found limited traction beyond promotional channels

Strategic Shifts: Premium, Digital, Global

Companies continued to diversify portfolios, strengthen D2C capabilities, and invest in premium and health-centric segments.

HUL acquired Minimalist for ₹2,700 crore, doubling down on the D2C personal care segment
ITC invested in Ample Foods (Prasuma, Meatigo), eyeing growth in protein-rich, ready-to-eat formats
DMart infused ₹175 crore into its e-commerce arm, Avenue E-commerce

Others like Marico and Tata Consumer focused on international expansion and premiumisation, though inflation and competitive pressures remain execution challenges.

Outlook: Execution Will Separate Winners from Survivors

As FY26 begins, most FMCG companies are approaching the year with guarded optimism. Input cost pressure may ease gradually, but urban demand remains fragile. Growth, going forward, will likely be driven by:

Innovation across product categories
Deeper rural penetration
Pricing discipline
Digital agility and direct-to-consumer expansion

This isn’t a return to broad-based, volume-led growth; it’s the start of a more differentiated, strategy-led cycle, where execution and adaptability will be key differentiators.

This article is intended solely for informational purposes and is based on publicly available data and reports. While every effort has been made to ensure accuracy and reliability, the content should not be construed as investment advice or a research recommendation. Readers are advised to exercise their own judgment and discretion before making any decisions based on this content. This does not constitute a recommendation to buy, sell, or hold any securities and should not be interpreted as such under SEBI (Research Analyst) Regulations, 2014.

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