Union Budget 2025: Will FMCG Companies Finally See the Long-Awaited Demand Push?

Union Budget Stock Market: From pure-play 'resilience' to straight 'uncertainty', the market mood has taken a sharp turn to pessimism during the past few months. Bearing the brunt of this trend is India's FMCG sector, thanks to downward demand play and entangled macros resulting in a rise in commodity prices.

The Nifty FMCG index have been one of the worst performing indices during the last 3 month period, dropping by over 7%. Sectoral giants, like HUL and Godrej Consumers have already reported blurry demand outlook dampening their bottom-lines.

With just a few days left for Modi 3.0's first full year budget to be presented in the parliament, D-street players are hoping to see a buck in this trend as expectations remain high for 'prudence' rather than 'populism.' Industry players are already anticipating the budget to incline more towards fiscal consolidation as government aims to reduce the widening deficit and concurrently stimulate consumption.

But will that be enough to give FMCG stocks the much-needed push on D-Street?

When things go south...

Last year didn't go well for consumptions stocks as heightening inflation levels and tightening liquidity environment took a toll on spending levels, eventually resulting in demand drying up, especially in the urban space. What made things worse, was a slowdown in government capex. Since FMCG companies heavily rely on consumer spending, any drag on the economy can lead to lower demand for everyday goods.

"H1FY25 was challenging in terms of an overall reduction in government spending, credit tightening in unsecured lending, consumption slowdown, especially in the urban area, extended monsoon, and inflation. These factors collectively have contributed to the slowdown in corporate earnings during H1FY25," Axis Securities said in a report.

Analysts are expecting the upcoming budget to maintain a balance between government capex and social reforms. "Overall capex spending is anticipated to range between Rs 11 trillion and Rs 11.5 trillion, reflecting a 15-17% increase compared to the revised spending for FY25," the report added.

This could provide the much-needed boost the economy needs right now, especially as many are labelling the current downturn as a cyclical slowdown.

Getting demand levels back on track is a top priority for industry leaders to spark growth in the consumption sector. For D-Street analysts, this remains important, as subdued macros and a complicated geopolitical picture are already weighing down FMCG stocks. While tax rebates for middle-class tops the budget wishlist, it alone might not be enough to spur consumption levels.

Hopes remain high for revival

"Since the last budget was a populist budget after BJP regained power for the third time in general elections conducted last year, we expect this budget to bring a little break for the middle class comparatively, considering the low level of consumption trends this year, especially the rural demand," said Anchal Kansal, Research Analyst at Green Portfolio, SEBI Registered PMS.

However, even if the budget inclines to a pro-consumption theme, external factors in the global space could influence the extent of this revival. This is largely owing to concerns in the valuation space. As per analyst, many large-cap FMCG stocks are already trading at high PE ratio of over 50x, indicating limited short-term upside.

"Investors should adopt a selective approach post-budget, focusing on FMCG companies with strong rural distribution networks, robust supply chains and pricing power to offset potential margin pressures. Stocks like Britannia, Nestle India and ITC could benefit from both rural demand recovery and urban discretionary spending," said Narinder Wadhwa, managing director and CEO of SKI Capital.

"Historically, budgets designed to enhance disposable income have positively influenced consumption-driven sectors," said Ajit Mishra - SVP, Research, Religare Broking.

However, the sector's long-term performance will hinge on the sustained recovery of demand and its ability to navigate competition and pricing challenges, he added.