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Consumer demand in India remained resilient in the second quarter of FY27 despite macroeconomic challenges, but rising input costs are expected to keep pressure on consumer sector companies' profit margins through the second half of the financial year, according to a report by Motilal Oswal Financial Services.
The report said the quarter ended on a healthy note, indicating that positive consumption trends are continuing, with further optimism around the festive period. However, inflation, weak rainfall and other macroeconomic factors remain concerns for the sector. "We currently do not model any growth deceleration in 2HFY27," the report said, indicating that the brokerage does not expect consumer demand growth to slow in the second half of FY27. Despite the positive demand outlook, consumer companies are likely to face pressure on profitability as several key raw materials continue to cost significantly more than they did a year ago. "The raw material basket remained inflationary in 2QFY27, with several key inputs continuing to trade significantly above last year levels," the report said. While crude oil and some of its derivatives moderated sequentially during the quarter, their prices remained elevated compared with the year-ago period. This is expected to weigh on gross margins in the second quarter, unlike the previous quarter, when low-cost inventory provided some relief to companies. The report expects pricing actions to offer only partial relief from higher input costs, leaving margins subdued. It also expects cost pressures to continue through the second half of FY27 as elevated prices persist. "Pricing should provide only partial offset, keeping margins subdued," the report said. Against this backdrop, companies' ability to manage product mix, pricing strategies and operating costs will be important in limiting the impact on earnings before interest, taxes, depreciation and amortisation (EBITDA) margins. "Product mix, pricing strategy, and cost levers should play a key role in arresting the decline in EBITDA margins," the report said. The reports outlook suggests that consumer companies may continue to see healthy demand even as higher input costs limit the benefits for profitability. The extent to which companies can manage these costs while sustaining growth is likely to remain important in the second half of FY27. The report also noted that the recent de-rating of consumer stocks could present opportunities in companies that continue to deliver strong growth. (ANI)
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