By Kritika Arora & Shubhra Tandon

Inflationary pressure and price hikes taken during July-September are expected to weigh on volumes and margins of consumer firms during the second quarter. Analysts expect consumer firms to post flat to mid single-digit volume growth during the quarter, in line with the preceding quarter, while margins are expected to remain subdued.

However, according to analysts, this is the bottoming out of the margins before improving from the December 2022 quarter, as benefits of softening raw material prices flow in.

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Even though some raw material prices such as those of palm oil and crude eased during the quarter, gross margins would be under pressure due to consumption of high-cost inventory.

Consumer companies have been seeing raw material inflation since the last 12-18 months across agri commodities, crude-linked commodities and palm oil, due to which they have been increasing prices of their products to pass on the spike in commodities cost to consumers. This, in turn, led to demand contraction in the last few months.

“Our channel checks indicate continued sluggish demand trends in 2QFY23, in line with 1Q, with flat volumes and mid-single-digit value growth for the industry on a 3-year compound annual basis,” Jefferies said in a report.

FMCG companies were unable to pass on the prices to the consumers completely due to fear of adverse effects of price elasticity on volumes, volatility in inflation and price-pointed packs having limited scope for grammage cut. “Therefore, marginal correction in input prices is likely to cover the deficit for companies. Basically, such marginal correction in raw material prices will likely revert the gross margins to previous levels rather than expanding them,” said analysts at ICICI Securities.

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Also, any respite from lowering of raw material cost will likely be invested back into advertisements and promotions, given the current demand situation and return of new product launches, which was reduced during Covid.

Rural demand has also remained subdued during the quarter. “We expect modest volume growth and high-single digit/DD value growth for most staple companies. Delayed or deficient monsoon impacted consumption marginally in Uttar Pradesh, Bihar and Jharkhand,” said analysts at Kotak Institutional Equities.