FMCG sector faced headwinds in Q2 of FY26

The fast-moving consumer goods (FMCG) sector experienced significant turbulence in the second quarter of the fiscal year 2026, grappling with the dual pressures of a major Goods and Services Tax (GST) rate revision and unseasonal heavy rains. A report from Nuvama Institutional Equities confirms that the dip in performance is attributed to delayed consumer purchases and a trade reluctance to stock up on higher-priced inventory ahead of the new rates. The report suggests that the shift to the new GST structure is likely to cause an adverse impact on sales volumes to the tune of 2-3%.

The transition process saw distributors and retailers prioritising the clearance of existing stocks with old prices throughout September. This critical inventory clearance led to the postponement of new stock orders, a cautious measure taken by the industry as it prepared for the implementation of the new GST norms, thereby impacting volumes, margins, and working capital days.

The inventory clearance and delayed transition have had a direct bearing on the packaging supply chain. Packaged goods with pre-printed maximum retail prices (MRPs) now require re-labelling or re-pricing. This necessity for affixing new price stickers or over-stamping existing packaging contributed significantly to the near-term working capital pressure. Further complicating the financial landscape is the persistent issue of the inverted duty structure post-GST cuts. The report highlights that oral care and personal care products are disproportionately worse off than food FMCG. This is because the input structure relies heavily on services (such as advertising, design, and logistics), for which the input tax credit is largely non-refundable, unlike food FMCG, which is more goods-driven and allows for refundable credits on packaging materials and ingredients.

A separate but interconnected packaging trend has emerged, particularly in response to the GST cuts, as highlighted by reports published by WhatPackaging? magazine on the importance of small packs. This trend reveals a complex pricing strategy: FMCG companies are choosing not to cut the MRP on popular low-cost items like INR 5 biscuits or INR 10 soaps, despite the GST reduction from 18% to 5%. Executives have expressed concern that lowering prices to "odd figures" would confuse shoppers and disrupt established, crucial "magic" price points, especially in rural markets. Instead of changing the price printed on the packaging, companies will pass on the tax benefit by increasing the pack size or grammage for the same price point. For example, an INR 20 biscuit pack would simply contain more product. Bikaji Foods’ CFO confirmed this strategy of extra weight in impulse packs, with Dabur’s CEO noting that the cheaper taxes are expected to boost overall demand. The Finance Ministry, however, is closely monitoring this to ensure the benefits truly reach the consumer.

In addition to the tax regime challenges, the Nuvama report cited heavy Q2 FY26 rains as a major contributing factor to the sector's struggles, with the monsoon adversely impacting the sales of summer-centric categories such as soft drinks, beverages, beer, and ice-creams, resulting in "two back-to-back tough quarters" for the summer portfolio. Furthermore, the report pointed to recent unrest in Nepal as an expected slight negative headwind for most consumer companies with exposure to the region during the second quarter. Despite all these challenges, the brokerage maintains an optimistic outlook, anticipating that the pressure on volumes, margins, and working capital days will reverse from November onwards, paving the way for a stronger second half of the fiscal year.