Margin Pressure Builds As Input Costs Rise Faster Than Consumer Prices

Indian wholesale price inflation rose sharply to 8.3% for the month of April, representing its highest rate in 42 months due to increased petroleum product and commodity prices, resulting in elevated costs associated with manufacturing and transportation. Meanwhile, India’s core consumer price inflation maintained its steady rate of 2.1%.

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The difference between the two measures is worth mentioning since the former indicates producers’ cost pressure, whereas the latter indicates consumer retail price levels. Thus, when wholesale inflation grows faster than consumer inflation, producers bear a portion of the increased costs instead of shifting them entirely onto consumers.

According to Ambit Capital, periods when the gap between WPI and core CPI crossed 300 basis points have historically resulted in gross margin contraction of nearly 300-370 basis points for NSE500 companies.

The brokerage noted that the current inflation gap could remain elevated through a large part of FY27, increasing the likelihood of pressure on earnings over the next two quarters.

Commodity Costs Rise Amid West Asia Tensions

The rise in wholesale inflation has been caused mostly by imported inflation caused by geopolitical conflicts in the West Asia region. The price of crude oil and natural gas has risen by more than 50% in recent months, thus increasing energy costs, freight cost, and other transportation costs.

The industries that use imported raw materials and crude-based inputs like chemicals, metals, plastics, textiles, and electrical equipment have had a notable increase in their input cost.

However, the situation regarding domestic demand has been quite uneven, with consumers not showing an appetite for goods and services in some of the discretionary segments.

These factors could put pressure on operating margins, especially in consumer-facing industries.

Consumer Sectors May Face Higher Earnings Pressure

Brokerage estimates suggest sectors such as FMCG, consumer durables, aviation, automobiles, cement, discretionary retail and oil marketing companies may face the strongest margin pressure if input costs continue to rise.

Within the automobile sector, premium products are expected to remain relatively resilient because higher-income consumers are generally less sensitive to price increases. Entry-level categories, as well as mass market categories, could come under pressure, as firms would be trying to defend volumes.

The historical pattern shows that there have been similar dynamics during commodity inflation cycles in the past, for example, during the financial crisis and disruptions caused by the Russia-Ukraine war in FY22 and FY23.

Nevertheless, industries directly tied to commodities could be fairly insulated. The upstream oil segment, metals sector, and certain segments of the chemicals industry would have pricing power, as their costs can easily be passed on to customers.

Moreover, businesses operating within the infrastructure space and capital goods sector that have escalation clauses in their long-term contracts might also see some relief in terms of margins.

With the assumption that the market has priced in earnings revival next year, there might be cost pressure as a major determinant of profit growth.