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Aarati Krishnan

BUDGET 2002 has a mixed impact on FMCG companies. Though the hike in surcharge on corporate tax may enhance tax incidence, the rollback of the distribution tax on dividends may leave FMCG companies with larger distributable surpluses. However, the taxation of dividends from companies in the hands of the investor at the applicable tax rates could have negative implications for FMCG stocks. With substantial free cash flows from operations and sluggish growth prospects, FMCG companies are among the largest dividend payers in the corporate sector.

Hindustan Lever: Savings on margins

FMCG major Hindustan Lever may benefit from a couple of the Budget's proposals. The halving of excise duty on cosmetics may pave the way for a reduction in selling prices, pepping up the offtake of HLL's personal product brands. The cosmetics business accounts for around 18 per cent of HLL's revenues. The slashing of peak Customs duty rates from 35 to 30 per cent lowers effective import duty on key toilet soap input-industrial oils by around 7 percentage points. This could perk up margins in the soaps business, which contributes around a fourth of HLL's revenues. Inputs to other FMCG products such as toothpastes and cosmetics will also benefit from the slashing of the peak rate of Customs duty. However, the sharp rise in the stock price in the run-up to the Budget limits the scope for further upward movement in the near term.

Cosmetics: Attractive benefits

Gillette India, which derives around 15 per cent of its revenues from shaving preparations, and Henkel SPIC, which derives around the same proportion from cosmetics, may benefit from the rollback of excise duties on cosmetics. Some benefits could be offset by changes in the abatement on retail price. But, the net benefit is likely to be positive. The reduction in excise duty may give these companies flexibility to reduce selling prices to pep up demand.

Sops for soaps

Players such as Henkel SPIC, Reckitt Benckiser and Nirma, which derive a significant portion of revenues from soaps, could benefit from the slashing of import duty on industrial oils. However, for Nirma, the Budget takes away some of the benefits from backward integration with the imposition of a 4 per cent special additional duty on N-Paraffin imports for the manufacture of LAB. This could push up costs on the backward integration project.

Hard-boiled confectionery: Abatement will decide

The decision to subject hard-boiled confectionery to MRP-based excise duty may not have any immediate implications for the players in the business — Parrys Confectionery, Hindustan Lever, Cadbury India and Nestle India. Much would depend on the rates of abatement eventually notified for this segment. However, any increase in excise duty incidence could hit players hard.

Most sugar-boiled confectionery products are marketed at specific and rigid price points, and it would be difficult to pass on any duty hike to consumers.

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