By eliminating slabs, and simplifying the tax structure, GST 2.0 has provided a huge boost across segments and sectors. One of the largest beneficiaries is the FMCG sector, largely because these items will not attract a lower five per cent on items of everyday use, such as packaged food, medicines, toothpaste, fruit, milk products, talcum powder and shampoo, as against the earlier 12 per cent or 18 per cent. This bodes well for the sales and profits of FMCG firms.
According to a report by Elara Capital, GST 2.0 delivers a structural boost to consumer staples, with most food and personal care categories taxed at five per cent, setting the stage for volume recovery, and organised sector (market) share gains. The largest gainers include Colgate Palmolive (13 per cent cut) and Britannia (12 per cent cut). A host of others, such as Nestle India, Dabur India, Emami and Mrs Bector Foods gain moderately. Some
like Hindustan Unilever, Marico, Godrej Consumer Products and Tata Consumer Products benefit slightly.
“Companies did pass on the benefits of GST 1.0 to consumers, and highlighted improvement in category growth, which are less penetrated and have a higher share of unorganised and regional brands. While quantification remained a challenge, companies did post margin improvement in the medium term,” contend the analysts Elara Capital. By extension, GST 2.0, whose expanse is larger, will have a greater positive impact on FMCG firms.
Let us consider the example of Hindustan Unilever. Let us begin with the stock price, which usually is an indicator of how investors visualise the future of a company. In the past 12 months, Unilever share has lost 7.6 per cent, which is way more than BSE Sensex (minus 0.5 per cent). The BSE FMCG Index lost more than 10 per cent in the past one year. However, the figures related to the past few months, and Year-to-Date (YTD) tell a different story.
In the past three months, Hindustan Unilever gained almost 10 per cent, which came down to just over four per cent in the past month. But its YTD gain was an impressive nearly 13 per cent. In comparison, the respective figures for the Sensex are a negative 1.7 per cent, 0.2 per cent and 3.2 per cent. The respective figures for the FMCG Index are 0.9 per cent, 1.6 per cent and a negative 0.1 per cent. Clearly, Unilever has outperformed the two.
Looking at the company’s financials, it is evident that the trends in share price reflect the outlook for the future, rather than its past performances. In Q1-26, Hindustan Unilever reported a 5.1% YoY (Year-on-Year) increase in consolidated net sales to Rs 165 billion, which was led by a five per cent underlying sales growth, and 4 per cent underlying volume growth. Growth was broad-based across segments, with beauty and wellbeing, personal care, foods and home care growing at seven per cent, six per cent, five per cent and four per cent, respectively.
The segments reported volume growth, except for personal care, where volumes dropped slightly due to price-led growth in skin cleansing. Categories that delivered double-digit growth included fabric liquids, premium hair care, premium skin care, health and wellbeing, premium skin cleansing bars (including Lux), body wash and coffee.
“Management is focused on driving volume-led competitive growth and expects to outperform in H1-FY26 versus H2-FY25. Pricing growth is expected to remain in the low single digit for FY26, assuming commodity prices stay stable,” states the Elara Capital’s report. The situation will change after GST 2.0. Price-led growth will take a back seat, as the prices of most products come down, or stabilise, and the focus will largely shift to volumes, which can enhance revenues, and profits if the sales of premium higher-margin products and segments take off. The GST cuts will allow the company to make deeper inroads in the semi-urban and rural markets.
Unilever’s focus on maintaining its competitive price-value equation, and expansion into newer fast-growing demand spaces should aid in driving a gradual improvement from here on. As volumes grow, and there are chances to increase profits, it will offer opportunities to tap newer segments, and enhance market shares in existing ones. It will be a two-pronged sales strategy to push cheaper (small packages) items in the rural markets, and premium ones among urban buyers.
Analysts hint at the same trends, as the company was pursuing a similar growth plan. “The shift in the portfolio mix from core categories to more premium and faster-growing demand spaces led by portfolio transformation initiatives, should support growth in the medium term. We upgrade our rating… (on the stock price) to ADD (from HOLD) with a higher target price of Rs 2,800 (52x Sep 2027F EPS) from Rs 2,525 earlier,” states a report by InCred Research Services. “Our EPS (Earnings per Share) estimate has increased marginally for FY26E and FY27E. We upgrade to Accumulate from Reduce with a higher TP (Target Price) of Rs 2,780 (from Rs 2,236), as we assign 55x June 27E P/E (from 45x) due to improved outlook, as we roll-forward,” says the report by Elara Capital. On September 11, the share price closed at a lower Rs 2,626.
There are a few risks. One of them is slower-than-expected recovery in sales and volume growth. Although GST 2.0 will help, there are a few ifs and buts. Most items that will attract five per cent GST will not be liable for refunds under input tax credit, or tax paid on inputs. This may lower the FMCG firms’ ability to lower prices. However, analysts are optimistic. “We believe some of the headwinds HUL (Hindustan Unilever) faced in FY25 were temporary. We expect volume growth to start recovering in 1H-FY26, in line with management commentary,” states a report by BNP Paribas Securities. The brokerage is excited about rural markets.
In addition, the tax on several items, including detergents, cosmetics, hair dye and household insecticides, remains unchanged. According to media reports, FMCG companies have stated that they are prepared to pass on the benefits of the duty cuts to consumers, though they acknowledge potential challenges in managing existing inventory at the retail outlets.
According to Elara Capital, Hindustan Unilever is sharpening its focus on the ‘future core’ and ‘market makers’ portfolio, which now contributes 50 per cent-plus of the annual overall business, and is expected to drive 80 per cent of the future growth. Continued investment has led to a portfolio shift from the traditional core segments to future core and faster-growing ones.
