In the long term, the outlook for home and personal care (HPC) companies remains good. The Indian economic story remains solid, the demographic dividend is not running out of steam, and, as a result, demand for consumer products will increase. Rising urbanization and better economic conditions in rural areas, too, adds to the growth opportunities. But investors are more concerned about the state in the near to medium term. Here, it becomes a little cloudy.

In the past one year, consumer non-durable stocks have done quite well, with the BSE FMCG index rising by 34% over a year ago, twice the rate of the Sensex. That is something to celebrate, but is an encore possible? Food companies are already facing a tough time, as rising inflation in food products threatens their cost structure. The responsibility for the sector’s performance now appears to rest on the shoulders of HPC companies.

But inflation is a worry for HPC firms as well. While better-off urban and rural consumers (much to everyone’s surprise) weathered food inflation well in 2010-11, consumers from lower income groups cut down spending. Cheaper alternatives became more popular and companies had to offer price or volume discounts to retain share. They also did not pass on rising raw material prices. If food prices remain volatile, the rich urban consumer may still not get affected, but the rural consumer may cut back. That will affect a key source of growth for HPC companies.

Graphic: Yogesh Kumar / Mint

In the year ahead, raw material prices seem headed up. The costs of key inputs such as palm oil (whose intermediates are used to make soap), chemicals, petrochemicals and packaging materials are all appearing volatile. In earlier quarters, firms decelerated their expenditure on advertising and promotion. This was partly due to higher spending in earlier periods, but also to save on costs. As competition remains high, and if growth shows any signs of a slowdown, they may have to increase spending again.

The situation for HPC firms does show cause for some concern in the near to medium term, chiefly because of the inflation overhang and stiff competition. While competition is here to stay, the hope then devolves on a cooling of prices. Till then, the times will continue to be tough for the sector.