The healthy and hygiene sectors became the next-big thing post COVID-19. The dynamics of the consumer and pharmaceutical space changed after the huge wave of demand. With steadily improving economy and spending patterns, consumer space is witnessing few stark trends in recent times especially after recently-concluded earnings season, said Jefferies.

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Studying these trends became difficult for the brokerage given the random local lockdowns in certain pockets of the country. However, the brokerage lined out three trends that are currently changing the overall dynamics of consumption space.

Rationale Behind Rising Operating Profit In April-June 2020

Jefferies in its report explained that consumer-focused companies were cutting out ad spends and other expenses to increase their operating profits. It said, "The 37 percent cut in ad-spends provided a 13-14 percentage points cushion to EBITDA for the period. If all the companies rationalise ad-spends with one-third this intensity for the rest of this year, EBITDA growth could look very different."

On the other expenses front, the brokerage said other area of savings for companies, which is partly attributable to a more stringent re-look at system-wide costs given the severe revenue pressure. Notably, not all items of 'Other Expenses' are entirely fixed in nature, some like freight, etc are linked to quantum of output.

Is Consumption Picking Up Or Still Low?

The brokerage highlighted that there's no pattern to gauge whether consumption was starting to pick up. "Offtakes were not all that bad for the April-June 2020 period after all; shortfall in overall growth was mostly a function of supply constraints," said the brokerage.

Different segments witnessed differing demands. Like, in case of packaged foods, it outgrew expectations helped by higher in-home consumption, local bakeries and other snacking options. Meanwhile, consumption in personal care items declined given that consumers weren't stepping out of their homes.

The report explained that these passing trends could likely reverse over time.

Input Costs Improved But Benefit Has Not Started To Show Up

Crude oil prices fell to an unimagined level in March-April 2020, almost to a nearly five-year low. The market's view that time was that whilst top-line is likely to be a challenge for the sector, the earnings would be protected by gross margins helped by lower crude prices, but didn't happen.

Despite improving net realisation, gross margins did not expand due to the carry over of higher-priced inventory bought in the past. Additionally, operational restrictions around higher-margin categories like personal care also affected the gross margins, said the brokerage.