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Has the Budget dished out goodies to FMCG? - Views on News from Equitymaster
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  • Mar 22, 2012

    Has the Budget dished out goodies to FMCG?

    The recent 2012-13 Union Budget was watched with much anticipation by the FMCG industry. Apart from other things, implementation of Goods and Services Tax (GST) and Foreign Direct Investment in multi-brand retail to boost consumer demand were eagerly awaited. Although there have been a few positives, the overall inflationary nature of the Budget is unlikely to provide any material benefit to FMCG companies.

    Income sweetener too low to fight inflation

    The implementation of the Direct Tax Code (DTC) has been deferred. But the Union budget has given consumers a reasonable hike in disposable income by raising tax slabs and offering incentives on interest earnings and equity investments. However a 2% increase in levy of taxes on goods and services is a dampener. Discretionary spending on a host of services such as telephone bills, cable television, courier charges, restaurant & hotel bills, travel charges, healthcare and insurance (to name a few), are likely to become more expensive. Barring LED/LCD televisions and mobile phones that have received custom duty cuts, all other consumer durables are also set to become dearer because of higher excise duty. So with inflation nibbling away into the additional tax savings, we do not expect a material rise in disposal income.

    FMCG goods see marginal increase in excise duty

    The 2012-13 Union Budget has been widely hailed as inflationary with increased levy of excise and service tax rates. Each of these tax rates have been raised from 10% to 12% across the board. FMCG goods hitherto attracted 10% excise. But as most of the FMCG companies manufacture goods in tax-free states, their excise duty incidence has been much lower at around 1%-5%. After the budgeted 2% rate hike, only a handful of companies namely Colgate, GlaxoSmithkline Consumer Healthcare, Godrej Consumer Products and Hindustan Unilever are likely to witness upto 100 bps rise in excise duty. Procter & Gamble Hygiene & Healthcare (PGHH) earns 60% revenues from feminine hygiene products that saw excise duty being raised from 5% to 6%. But benefits of manufacturing in excise-free locations have neutralized the impact for PGHH. Biscuits that were being charged differential excise rates of 5% and 10% will now see hikes of 1% and 2%, respectively. As Britannia, outsources most of its production from excise-free states, the company will hardly be impacted by the duty burden.

    Modest rise in excise rates for FMCG companies
    Company name Current Excise duty New Excise duty Incremental duty
    Britannia 0.8% 0.9% 0.2%
    Colgate 4.2% 5.0% 0.8%
    Dabur 0.9% 1.1% 0.2%
    Emami 1.5% 1.8% 0.3%
    GlaxoSmithkline Consumer Healthcare 5.2% 6.2% 1.0%
    Godrej Consumer Products 3.3% 4.0% 0.7%
    Hindustan Unilever 4.5% 5.3% 0.9%
    Marico 0.0% 0.1% 0.0%
    Nestle 2.4% 2.9% 0.5%
    Procter & Gamble Hygiene & Healthcare 3.5% 4.2% 0.7%
    Source: Ace Equity

    A few positives for some FMCG companies

    There have been a few categories where the Budget has doled out tax concessions. For example, the basic customs duty on probiotics has been halved to 5%. This will benefit companies such as Gujarat Cooperative Milk Marketing Federation (GCMMF) which markets its products under the brand 'Amul' and Nestle. But a 1% increase in excise duty on ice creams and flavoured milk will partially offset these benefits.

    Similarly in the case of cigarettes (65 mm), while customs duty has been reduced on one hand, an additional ad valorem duty of 10% has been levied on 50% of its retail sale price. ITC currently attracts an excise duty of 31%. But increase in excise duty on other forms of tobacco such as bidis, pan masala, gutkha and chewing tobacco, is likely to provide some succor to cigarette companies.

    Food and beverage companies are expected to benefit from the Budget. Steps such as increasing the plan outlay for agriculture by 18%, R&D initiatives in farm sector and allocations for improving warehousing and storage facilities for agricultural produce will improve supply issues. Improved raw material availability will lower costs for food & beverage companies in the long run.

    GST and FDI in multi-brand retail still to come

    Important issues such as GST and FDI in multi-brand retail have been put in the back-burner. GST aims to reduce the overall tax incidence by replacing a multitude of indirect taxes with a single and unified GST rate. This is expected to improve the competitiveness of FMCG goods and thereby boost consumer demand. While the Union Budget has deferred implementation of GST to August 2012, there there is no clarity on the implementation of FDI in multi-brand retail.

    Profit margins to come under pressure

    With crude prices still ruling high, packaging and transportation costs continue to remain buoyant. Commodity inflation, even after easing, hovers higher compared to year-ago levels. Mid-sized companies like GCPL, Marico, Dabur and Emami have hinted at price-hikes. Most of the large FMCG companies enjoy significant pricing power and may consider passing on the cost burden. However, during the past year, FMCG companies have already taken modest price-hikes, and yet seen good volume growth. These large FMCG companies are unlikely to upset their growth apple cart by undertaking big-ticket price-hikes. Yet if prices are not increased, profit margins will come under pressure.

    In a nutshell

    The Union Budget 2012-13 has hardly bought any cheer to the consuming population. On one end it marginally sought to add to the common man's kitty by ushering in liberal taxation and incentives on interest income and equity investments. But, by imposing higher taxes on manufactured goods and services, it has more than offset any increased purchasing power. So, the FMCG industry, whose fortune is linked to consumer's disposable income; will face a double-whammy in the form of incremental costs, and a dilemma whether prices can be raised without affecting demand.

      Madhu Gupta (Research Analyst), Managing Editor, ResearchPro has a post graduate degree in both physics and finance. Having worked with India's leading economic research agency, she has a natural flair for numbers and analytics. She brings with her a near-decade long rich experience in the field of finance. A firm believer of the principles of value investing, she looks for robust businesses with durable competitive advantages. Madhu contributes towards our small cap service Hidden Treasure.



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