The Hindu Business Line : FMCGs: In good shape, but seek relief from margin pressures

The tweaking of customs or excise duty rates on specific FMCG products in the Budget may no longer materially influence the earnings or growth rates of FMCG companies.

Most FMCG products have moved to a uniform rate of excise duty after the systematic rationalisation and reduction in duties over the years. Additionally, FMCG companies have shifted a significant proportion of their manufacturing facilities to tax-free zones over the past three years and thus enjoy tax and duty exemptions on a significant portion of their revenues.

In this backdrop, the Budget measures that would have the most material implications for the sector would be those with macro implications. A lowering of personal tax rates or exempt housing loan repayments may help boost consumption. Measures to jumpstart rural spending or improve access to credit may help broadbase demand for FMCG products.

Backdrop

FMCG companies have reported a surge in sales growth rates, from the low teens in the past couple of years, to the high teens in the first nine months of the current year. Sales growth for 11 major listed FMCG companies averaged 16 per cent in the nine months to December 2007.

While a few players such as Marico and Godrej Consumer registered strong growth rates helped by inorganic growth, renewed acceleration in nascent categories such as foods, health and beauty drove strong sales growth for players such as Nestle India, Britannia Industries and Hindustan Unilever.

Apart from increasing demand for premium FMCG products driven by expanding urban spends, the offtake of staple FMCG categories such as soaps and toothpaste have also benefited from healthier demand numbers from rural and semi-urban centres during this period.

Players attribute the latter to increased rural access to credit and rising income levels on the back of the expanding employment avenues outside of agricultural activities for rural wage earners.

The lag effect of a good monsoon may work in favour of FMCG companies and categories (soaps, toothpaste, laundry and shampoos) with a significant rural bias. In this respect, buoyancy in rural spends on FMCGs may be sustained over the medium term only if public outlays on agriculture and rural employment continue to filter down to the consumer level.

Profit growth for FMCG companies has stayed comfortably ahead of sales growth so far this fiscal, with the average profit growth for the eleven companies at a robust 35 per cent for the nine months ended December. However, there has been considerable divergence in profit growth between companies based on the categories where they operate. The highest rates of profit growth were registered by Britannia Industries, which reaped substantial savings from excise duty cuts on biscuits in the previous budget and Colgate-Palmolive, which has seen a reduction in its overall tax incidence due to newly commissioned capacities in tax havens.

On the other hand, profit growth for players such as Godrej Consumer and Hindustan Unilever has been tempered by margin pressures in this period.

An inflationary environment for inputs to such as vegetable oils and petroleum derivatives, which are key inputs for soaps and laundry products, have resulted in pressure on profit margins in these segments.

Though players have managed to take price increases on products to offset such pressures, low and mid-priced offerings have seen consumer resistance to price increases.

Key expectations from the FMCG sector for the forthcoming Budget centre around a reduction in Central Sales Tax (from 3 to 2 per cent), relief on excise duty on soaps and detergents (currently at 16 per cent), reduction in import duty on palm oil derivatives and reduction in VAT on segments such as biscuits, cigarettes and pan masala from the present rate of 12.5 per cent.

Of these, the reduction in VAT on cigarettes and biscuits (positive for ITC and Britannia) and a cut in import duty on palm oil imports (positive for Godrej Consumer and Hindustan Unilever) may have significant implications for the respective players.

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