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New Delhi: Makers of fast moving consumer goods (FMCG) could see recovery in the second half of the current financial year (2HFY23) as input cost pressures ease and rural demand makes a comeback, analysts at Jefferies said in a note.

Consumer staples faced the brunt of inflationary pressures on input costs, coupled with a slowdown in demand. In fact, six out of 11 packaged consumer goods companies covered by Jefferies missed estimates mainly due to gross margin pressure.

However, managements across companies remain optimistic of a recovery in 2HFY23, on the back of 20-50% correction in crude and palm oil, low base, and a likely recovery in rural markets, they said. The September quarter (Q2) will continue to see margin pressures.

“Margin outlook is still weak for Q2 but the recent input price correction should drive a margin recovery in 2HFY23 which should coincide with a pick-up in demand," analysts said in a research note on consumer staple companies.

The June quarter (Q1) saw the full impact of spike in input prices, led by crude and palm oil. Inflation pressure across raw materials—packaging and fuel was worse-than-expected. Demand also remained muted for certain categories. As a result, tough macro and high inflation impacted volumes. In fact, revenue growth was largely led by price hikes.

“This, coupled with rural slowdown and inflation denting consumer wallets, led to muted 5% EBITDA growth for our coverage (excluding ITC and Varun Beverages Ltd)," the report said.

Meanwhile, certain categories such as carbonated drinks, juices and ice creams reported a strong growth albeit on a low base and an intense summer.

“Recovery in mobility supported cigarettes, colour cosmetics and detergents (despite price hike). Hair oils, soaps, tea, health drinks, household insecticides, oral care, premium edible oils and skin care (mass brands) saw tepid volumes, as consumers titrate off-take. Ayurvedic supplements saw 25% decline year-on-year led by post covid normalization," the report said.

Analysts at Jefferies, however, added that management commentary across companies pointed to optimistic recovery in 2HFY23, on the back of recent correction in palm and crude oil prices, low base, and likely recovery in rural demand that softened in the last few quarters.

“Benefit of lower crude and palm prices would accrue only with a lag, as companies have to consume high cost inventory in Q2FY23," they said.

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