New Delhi [India], April 12 (ANI): The Indian consumer sector will see a gradual recovery starting from the first quarter of financial year 2026 (Q1FY26), driven by encouraging signs of rural revival, even as urban demand remains tepid in the near term, according to a report by HDFC Securities.

The report adds that the key indicators, such as healthy reservoir levels, increased state welfare initiatives targeting women, and a strong budgetary push towards rural development are expected to support rural consumption.

'Green shoots have been observed regarding rural recovery, which will support companies moving forward from next quarter onwards,' the report added.

Meanwhile, the report highlights that the urban recovery is likely to take shape over the medium term as inflation across essential categories like food, rent, and healthcare begins to ease, complemented by income tax relief announced in the February 2025 Union Budget.

The report says that its ground checks suggest that the demand environment for FMCG has not seen any meaningful improvement due to factors such as the macroeconomic environment, the rise of quick commerce, and inflation.

The macroeconomic environment remained subdued, specifically in the urban landscape in the last few quarters.

The rise of quick commerce (QC) has led to market share gains at the expense of traditional channels, which is affecting the space.

Additionally, the report highlights that the flexible direct-to-consumer brands have a competitive edge within the QC space, impacting the consumer space.

It further adds that a sharp surge in food inflation, coupled with reduced lending by financial institutions, has negatively impacted urban consumption.

In the short term, the report anticipates, gross margins will decline by around 130 basis points yearly, primarily due to a weaker product mix, as consumers increasingly shift toward smaller, lower-priced SKUs (stock keeping units).

Additionally, cost pressures from rising prices of key agricultural commodities--such as wheat, edible oil, tea, coffee, copra, and milk--are weighing on margins.

However, household and personal care (HPC) companies are likely to fare better, as per the report.

'We expect a gradual build-up in gross margin in the coming quarters as companies take calibrated

price hikes and see increased premiumization, given the moderation in food inflation led by a strong Kharif and Rabi crop harvest,' the report added (ANI).