Suryaa Business Desk: Surya Market & Consumer Bureau, Mumbai: Despite macroeconomic challenges and uncertainty in international markets, consumer demand in India remains robust... Surya Market & Consumer Bureau, Mumbai: Consumer demand in India continues to be strong despite macroeconomic challenges and uncertainty in international markets. Although consumption demand ended with strong growth in the second quarter (Q2), rising raw material costs are putting severe pressure on the profit margins of consumer and FMCG companies, leading domestic brokerage firm Motilal Oswal Financial Services revealed in its latest report. While the upcoming festive season will further boost demand, it is clear that the cost challenge for companies' profitability is looming. Festive spirit – strong consumption trend: Motilal Oswal said consumption demand is unlikely to slow down in the second half (2H) of the current fiscal year.
Demand for the products of leading companies like Dabur, Marico, Godrej Consumer and Voltas is steady as recovery is seen in urban as well as rural areas. Market figures indicate that sales in the essentials, personal care, packaged foods and home appliances segments are strong. Impact of raw material inflation on margins: Despite robust demand, raw material prices continue to challenge companies' profit margins: Commodity basket load: Prices of agricultural products, palm oil, coffee, chemical raw materials as well as consumer durables such as copper, steel and aluminum continue to remain at record highs compared to the same time last year. Crude Oil & Logistics: Crude oil prices are fluctuating internationally, with packaging, transport and logistics costs weighing on companies' operating profits. Constraints on input price hikes: Despite the rise in cost inflation, companies are unable to pass on the full cost burden to consumers to attract consumers during the festive season.
Analysts expect operating margins to decline as some companies partially raise prices, bearing the costs themselves. Outlook for coming quarters: While revenue growth is likely to continue at double digits, growth in EBITA and net profit is likely to remain limited for some time, Motilal Oswal said. Market experts suggest that investors remain cautious on the recovery of consumer sector companies' margins until commodity prices stabilize and supply chain adjustments take place.