FMCG companies face sustained margin pressure in the second half of the current fiscal year, as rising input costs squeeze profitability, with firms weighing post-Diwali price hikes against the risk of hurting consumer demand, particularly in price-sensitive mass-market and rural categories.

Input-cost pressures intensified in the September quarter, reversing some of the moderation seen in the preceding quarter, which squeezed margins even as companies absorbed part of it to protect consumer demand during the festive season.

The increase has been uneven across commodities, with crude-linked derivatives, packaging materials, palm oil and sugar emerging as key pressure points, said Naveen Malpani, Partner and Consumer Industry Leader at Grant Thornton Bharat.

"In rupee terms, palm oil prices were approximately 21% higher year-on-year in September, while sugar prices remained around 18% higher year-on-year despite correcting 8% month-on-month," he said.

Higher costs have not been fully offset by price increases and operational efficiencies, putting pressure on operating margins, Malpani said.

"Pre-results analyst estimates projected operating-margin compression of approximately 45 basis points year-on-year across a group of major consumer staples companies, with some estimates indicating declines of up to 150 basis points for the companies covered," he said.

Companies operating in mass-market categories had limited room for aggressive price increases due to affordability concerns, making cost optimisation, procurement efficiencies and calibrated pricing crucial to protecting profitability without hurting demand.

"The sector should therefore prepare for continued margin pressure through H2, with recovery contingent on actual commodity movements rather than an assumption that the cost cycle has peaked," Malpani added.

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