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Take aways from the FMCG conclave - Views on News from Equitymaster

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Take aways from the FMCG conclave

Dec 17, 2004

The stalwarts of the FMCG sector met in Mumbai for the 3rd FMCG conclave held by CII. We attended the event and following are the key points that really stood out from that forum. The FMCG industry is growing at a sluggish 1%-2%, while Chinese FMCG industry is growing at 12%, Bangladesh at 9% and Pakistan 8%. The industry attributed this underperformance to:

High level of taxation: Indirect taxes form between 14%-16% of total MRP of FMCG products. Import duties form another 4%-7% of the total value. It is estimated that the Indian players cough up nearly 22% to 35% of revenues as various taxes levied at the centre and state level. In contrast, Chinese manufacturers pay between 14%-17%, Thailand 7% and Indonesia 12%.

The point of the FMCG companies was that if taxation is lower, government revenues would continue to climb as growth picks up. Example: Colour TVs are 33% cheaper in China and CTV consumption is 6 times that of India.

Laws are outdated: The industry view was that the current laws with relation to IPR protection and state level taxation were outdated. For example, if a company sees a somewhat spurious product which is a look alike of its brand, it has to first get proof to the concerned authorities, only then the action will be taken against the offending parties. Even post that, the offence is immediately bail able and the spurious manufacturer gets back to business immediately. The spurious goods account for nearly 5%-10% of the overall FMCG revenues.

These laws were made in the context of ‘low supply’ era of 1940’s-50’s. Owing to this, the spurious products continue to flourish and there is a loss both to organised players as well as to the government exchequer.

Anomaly in tax-excise concessions: While the industry welcomed the tax and excise concessions available to manufacturers in backward areas like Himachal Pradesh, it was felt by some members that this increases production distortions and leads to shift in existing manufacturing capacity, rather than infusion of fresh capacity investment.

Lack of encouragement to FDI in retailing: The industry was largely unanimous is asking the government to encourage FDI in retailing. To quote some stats, while organised trade contributes to 1% of P&G’s revenues in India, the ratio is 50% for P&G China and 75% for both P&G Egypt and Morocco. The view was that if encouragement were given to organised retailing, it would improve the overall systems within the sector. The industry quoted Mckinsey’s view that if organised retailing thrives, it has the capacity to add 1.5% incremental to the country’s GDP.

In our view, much of the industry’s demands are on their way to being met. The following points enumerate our stand.

  1. IPR protection: The policymakers seem to be more open to the idea of enforcing IPRs, which is a big positive. The change in laws is an ongoing process and the movement is forward looking.

  2. VAT implementation: The grouse of double taxation etc is likely to go away in a few years as VAT gets implemented. The Finance Minister himself has indicated his support for ‘single country tax’. Though VAT in its current avatar is not without flaws, here too the movement can only be forward.

  3. FDI relaxation: The government has recently allowed FDI to companies vending single products or brands, which again is an encouraging sign.

  4. Rural focus: Another key positive for the sector is the current government’s focus on rural India. The aim is to make India the hub of agri-processing. The e-choupal (ITC) and Shakti (HLL) initiatives by corporates is likely to shape the dynamics of what farmers produce going forward, with improved efficiency. The interest of Group’s like Bharti and Reliance in investing in this sector points to the potential.

In conclusion, the industry is very clearly sold on Dr. C. K. Prahlad’s concept of ‘value at the bottom of the pyramid’. They recognise that India is a value led market. There are numerous examples of buoyant growth if the price proposition is right (telecom, home loans, consumer durables). Therefore, the focus was on improving efficiencies, reducing costs, improving supply chain efficiencies to look at giving value to consumers, in a bid to bring about internal factors led growth.

We believe, as the economy continues to sustain its growth momentum between 5.5% to 6% GDP growth, the Indian consuming class will keep expanding. This in turn, will provide the much-needed boost to the Indian FMCG sector. In the current scenario, we are overall optimistic on the key players in this sector (refer our Research reports and Stock Selects). Their valuations too are not stretched even in this scenario and the risk reward ratio for the investor over a 3-year horizon is favourable.

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