Lookback: How FMCG Margins Climbed Out of the 2023 Trough

Eighteen months of softer inputs, harder premiumisation, and a slow rotation back into staples that the Street wrote off in late 2023.

In the last week of October 2023, the Nifty FMCG index was the most boring chart in the market. Capital goods were ripping, PSU banks were on a tear, defence was vertical, and the staples basket sat in a sideways drift that had already lasted the better part of a year. Rural volumes were limp, palm oil was sticky, urban premium was the only thing working, and most fund managers I spoke with that quarter were quietly trimming HUL and Marico to fund the cyclical names. By 16 April 2025, that consensus had reversed. Operating margins for the listed staples basket had pushed past their pre-pandemic peaks for the first time, the index had reclaimed leadership for two clean quarters, and the same brokerages that downgraded the sector in November 2023 were issuing "stay overweight" notes citing margin durability into FY26. The cycle did not announce itself. It worked by quiet compounding, one input-cost line at a time.

The trigger, in retrospect, was almost entirely cost-side. Through the first half of FY24, listed FMCG companies were still absorbing the lagged effect of the 2022 commodity spike. Palm oil, which feeds into soaps, shampoos, biscuits, and edible oil portfolios, had come off its peaks but was holding in a range that compressed gross margins for Marico, Godrej Consumer, Britannia, and HUL's home-care segment. Crude derivatives (linear alkyl benzene for detergents, packaging resins, freight) were similarly stubborn. Skim milk powder and cocoa, the two inputs that Nestle India and Britannia watched most closely, were on opposite trajectories: SMP softening, cocoa beginning its now-infamous rip. The October 2023 quarter print, delivered through that November, was the moment the market actually capitulated. Volume growth for the staples basket aggregated in the low single digits, value growth was almost entirely price-led, and gross margins for the FMCG-50 set tracked by domestic brokerages came in roughly 250 to 300 basis points below the pre-pandemic average. Several names cut full-year guidance. The Nifty FMCG underperformed the broader Nifty 50 by a wide margin in that calendar quarter, which is unusual for a defensive basket heading into a slowing macro.

What changed over the next four quarters was almost entirely on the cost line. Bursa Malaysia palm oil traded down through the December 2023 to March 2024 stretch as Indonesian output recovered and Indian buyers ran down inventory. Crude held in a $75 to $85 Brent range that gave packaging and freight some relief. The rupee weakened, which hurt on the import side, but the rupee weakness was orderly and far less violent than the 2022 episode, which meant hedging desks could pass it through without the kind of margin shock that defines a true cost-push quarter. Wheat was managed by government stock releases through the 2024 election window. The one consistent headwind was cocoa, and it bit Britannia and Nestle hardest in the premium chocolate and confectionery lines, though both companies had enough mix levers to mask most of the damage. By the June 2024 print, the aggregate gross margin for the listed staples basket was back within striking distance of its pre-pandemic mean. By the September 2024 print, it had crossed it. By the December 2024 print, it was at a multi-year high. Operating margin expansion lagged by about a quarter because A&P spends were rebuilt aggressively through the summer, but the operating leverage flowed through the March 2025 print with conviction.

Caption: The weekly view shows the long sideways drift through 2023, the false start in February 2024, and the clean breakout from August 2024 onwards as margin expansion got priced in.

The sustaining factor, once the cost tailwind kicked in, was premiumisation. This is the most over-used word in Indian consumer research and also the most quantitatively real one in this cycle. The mass end of the market (sub-₹10 SKUs, regional players, hyperlocal price-warriors) stayed weak through most of FY25 because rural wage growth lagged inflation for longer than anyone expected. The premium end, however, kept compounding. Nestle's premium coffee and prepared-foods portfolios, Britannia's adjacent-category push into croissants and wafers, HUL's beauty and wellbeing reset under the new operating structure announced in mid-2024, Tata Consumer's Sampann staples and Soulfull breakfast lines, Marico's Saffola high-margin oats and honey extensions, Godrej Consumer's Park Avenue and Cinthol premium tiers, ITC's Bingo, Yippee, and Aashirvaad organic ranges, all of these contributed disproportionately to incremental revenue and to gross margin mix. The arithmetic was simple. A 50 basis point shift in mix toward the premium tier was worth roughly 80 to 120 basis points at the gross margin line for most names, and the shift was persistent rather than cyclical. Quick commerce accelerated it, because the unit economics of 10-minute delivery favoured higher-realisation SKUs and the platforms preferred listing them, which meant the consumer was being nudged up the price ladder every time she ordered.

The leadership inside the basket rotated through the period in a way that rewarded patience. Through the first leg, from October 2023 to roughly May 2024, Nestle India and Varun Beverages were the cleanest performers. Nestle's premium portfolio kept compounding through the cost squeeze because its gross margin starting base was the highest in the basket, which meant the incremental hit was absorbed without earnings cuts. Varun Beverages was a different animal, less a staples name and more a route-to-market compounder, with the Africa expansion and the summer-of-2024 heatwave driving volume prints that the rest of the basket could not match. Through the middle leg, from May 2024 to roughly November 2024, the leadership shifted to Tata Consumer and Britannia. Tata Consumer's transition from a pure tea-and-coffee play to a broader staples house played out in the print, and Britannia's pricing power on the biscuit base partly offset the cocoa drag in chocolates. The final leg, December 2024 to April 2025, was when HUL re-rated. HUL had been the proverbial dead money for nearly thirty months. The combination of rural recovery becoming visible in the December quarter, the beauty-and-wellbeing demerger creating a cleaner story, and the simple base-effect math on margins, pulled the stock from a multi-year discount to its own historical average back toward parity.

ITC sat outside the cleanest version of this story because the hotels demerger and the cigarette taxation overhang gave the stock its own narrative, but the FMCG-others segment inside ITC quietly delivered the strongest operating margin expansion of any single business unit in the listed staples universe over the eighteen-month window. Dabur was the laggard, weighed by distribution restructuring, juices-category competition, and a healthcare portfolio that did not get the kind of mix tailwind that the others enjoyed. Emami floated in the middle, helped by the international business and Kesh King's stickiness. Colgate, often forgotten in these narratives, was a quiet outperformer in the second half as oral-care premiumisation showed up in print.

Caption: Watch the leadership handoffs. Nestle and Varun lead the first leg, Tata Consumer and Britannia take the middle, HUL closes the gap in the final quarter.

The cross-sector picture is where the cycle gets genuinely interesting, because FMCG did not lead the market through this window. It was, for most of the eighteen months, a distinct underperformer. Capital goods, defence, railways, and select PSU names ran far harder through the first half of CY24. Private banks were sluggish but the broader financialisation theme worked through capital markets plays. IT services had its own micro-cycle around generative-AI deal commentary. FMCG, in this comparison, was the rotation trade, not the leadership trade. The pivot came in two stages. The first stage was the October 2024 correction in the broader market, when domestic small and mid-cap names took a sharp drawdown on stretched valuations and FII outflows accelerated. Defensives caught a relative-strength bid in that drawdown, and FMCG was the cleanest defensive available, because pharma had its own US-pricing overhangs and IT was tethered to the Fed cycle. The second stage was the January to March 2025 stretch, when the margin print and the rural recovery commentary combined to drive an absolute re-rating rather than just a relative one. By the time the focus week of mid-April 2025 closed, the sector was no longer cheap on a price-to-earnings basis. The argument for staying involved had shifted from "valuations are reasonable" to "earnings revisions are still going up."

FII flows through the window were instructive. Foreign investors were net sellers of Indian equities through several months of 2024, particularly the October to December stretch, and FMCG took its share of that outflow even though it was the defensive bucket. The DII bid, particularly from domestic mutual funds running aggressive consumption-themed and large-cap-quality mandates, absorbed it cleanly. SIP flows into equity mutual funds were running at record monthly highs through this period, and the staples basket benefited disproportionately because index weights in large-cap funds skewed toward HUL, ITC, and Nestle. The structural domestic bid is the single most underappreciated reason that FMCG corrections in this cycle were shallow and short. When FIIs sold, DIIs bought, and the bid was deep enough to absorb large block trades without the kind of cascading drawdown that characterised previous FMCG cycles like 2018 and 2019.

The brokerage commentary tracked the price action with the usual lag. Through November 2023 to February 2024, the dominant note was "valuations have de-rated but earnings are not visible." Through March to August 2024, the note shifted to "input cost relief building, watch for the second-half print." From September 2024 onwards, the upgrades came in waves, first targeting Nestle and Britannia, then expanding to Tata Consumer and HUL by January 2025. Several houses moved the FMCG sector from underweight to neutral and then to overweight inside a single six-month window, which is rare for a defensive basket. The consensus FY26 earnings growth estimate for the listed staples set was revised upward roughly four times between October 2024 and April 2025, with the cumulative revision being meaningful rather than cosmetic. The price action embedded most of it before the upgrades printed.

Caption: The session-level view on the focus date shows the basket trading with low intraday volatility and a steady DII bid into the close, classic late-cycle staples tape.

The historical analog worth holding next to this cycle is 2014 to 2016. That cycle had a similar structure. Crude collapsed through late 2014 and into 2015, palm oil softened, gross margins for the staples basket expanded by 200 to 300 basis points on aggregate, and the Nifty FMCG outperformed the Nifty 50 with consistency through 2015 and into the first half of 2016. The cycle ended when input costs began normalising upward through the second half of 2016 and demonetisation introduced a sharp volume disruption in November of that year. The structural differences with the current cycle are also worth flagging. In 2014 to 2016, premiumisation was a thinner story, quick commerce did not exist, the D2C channel was negligible, and the rural-urban split was less pronounced. In 2023 to 2025, every one of those factors layered on top of the cost tailwind to produce a sharper margin expansion with longer durability. The risk-mirror is also more complex. Cocoa is a real and persistent headwind. Crude is a wildcard tied to geopolitics. Palm oil is range-bound but Indonesian and Malaysian policy can flip the supply picture inside a single quarter. The rupee, structurally, is a slow leak that no FMCG management can fully hedge through a multi-year window.

The one debate that remained genuinely open at the end of the April 2025 focus week was whether the next leg would be earnings-led or rotation-led. The valuation case was no longer obviously cheap. HUL had re-rated, Nestle had compounded into the upper end of its historical band, Britannia was no longer the bargain it was in March 2024, and Tata Consumer had been one of the strongest performers in the entire Nifty 100 over the prior twelve months. For the cycle to extend cleanly, gross margin expansion needed to either continue (which required cost lines staying benign, which was no longer the consensus) or be replaced by operating leverage on volume recovery (which required the rural pickup to broaden beyond a few categories and beyond the top end of the income pyramid). The honest read at the time was that both engines had moderated but neither had reversed. The setup favoured a steady grind rather than a sharp re-rating, with the rotation trade no longer offering the easy alpha it did in late 2024.

VERDICT

• Stance: NEUTRAL with a positive bias on a 3-month horizon for the basket, BULLISH on premium-mix leaders inside the basket (Nestle, Tata Consumer, Britannia) on a 3-month horizon, and NEUTRAL on the broader staples index on a 1-month horizon.
• Horizon: 3mo primary, 1mo for tactical positioning.
• Rationale: Margin expansion had largely played out by April 2025 and the easy re-rating was behind the cycle, but earnings revisions were still trending positive, the DII bid remained structural, and the premium tier inside the basket continued to compound mix gains. The trade had shifted from cycle-buying to stock-picking inside the cycle, which is usually the longer and less spectacular phase.

The lesson the eighteen-month window left behind, for anyone who tracks Indian consumption cycles, was straightforward. The FMCG basket is rarely the loudest trade in the room, and the windows in which it leads the market are usually entered after a long stretch of quiet underperformance. The October 2023 setup, in hindsight, was textbook. Input costs at the high end of their range, volume growth at the low end, valuations compressed against a long-term mean, and consensus uniformly negative. The trade was not glamorous and the entry was not obvious. The exit, when it eventually comes, will look the same in reverse.