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Friday, Jul 09, 2004

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Rural sops to get FMCGs going

THE sluggish FMCG sector may have finally found the kick-start that it was looking for in the Union Budget's thrust on agriculture and sops given for the rural economy.

The Finance Ministry's skew towards the rural sector through various measures, including water and housing, is expected to augur well for companies in this sector.

While the urban consumer is unlikely to get impacted, more money in the hands of the rural consumer should help in creating rural demand that has been missing for a while. Analysts tracking the FMCG industry feel that most of the FMCG companies, such as HLL, Colgate and Dabur who have been relying heavily on the rural markets, should witness a turnaround in their fortunes as a result of the sops announced.

According to Mr Ashok Chhabra, Executive Director, Procter & Gamble India, "This is a good Budget because it has announced steps to improve the lives of the rural poor. Rural investment in the agricultural sector, which constitutes 70 per cent of India's population, will not only improve the quality of life of villagers but also increase their purchasing power, which in turn will drive overall economic growth through better irrigation, rural credit and use of technology. We also look forward to the roadmap (the Finance Minister) has laid down for the implementation of state VAT." Likewise, Mr H.K. Press, Executive Director & President, Godrej Consumer Products, says, "We feel it is a growth-oriented Budget. The thrust given to the rural sector will stimulate demand and that will have a positive impact on FMCG companies such as ours."

According to Mr Harsh Mariwala, Chairman & Managing Director, MaricoIndustries Ltd, this Budget is a macro-economist's Budget with a focus on grassroot-level implementation. "It reflects moderation and stability as also the aim of balanced and equitable development, with emphasis on education, agriculture and health," he says.

The FMCG industry, according to Mr Mariwala, will gain from the trickle-down effect of the major increase in social investments, but there could have been a greater effort to leverage the opportunity of demand push arising out of the relatively high growth in GDP, especially in agriculture.

Mr Satish Kumar, Managing Director of Henkel SPIC, also echoes the view that FMCG consumption was bound to benefit if the Budget measures managed to prop up rural consumption. "Proposals such as higher rural credit and excise exemptions on tractors could put more money in the hands of rural consumers. But this will take time to show up," he says. But he too points out that service taxes could have a cascading impact on costs for the FMCG sector.


SEVERAL proposals in Budget 2004 could spur consumption for the FMCG sector over the long term. But the immediate impact of the Budget proposals on the sector is mixed and varies between players.

  • Plans to roll out VAT by April 2005 could eventually reduce the incidence of taxes, reduce the number of manufacturing locations and simplify procedures, thus cutting costs for FMCG companies. But the immediate impact would depend on the VAT rates announced and a speedy resolution of issues such as state levies and stock transfers.

  • A freer flow of credit to farmers, employment guarantee schemes and welfare measures targeted at rural areas may help free up rural spends, which could help pep up consumption of FMCGs over a two-three year period. Companies, which have an extensive rural presence such as HLL, Godrej Consumer and Colgate-Palmolive would be the key beneficiaries, while urban-oriented players such as Gillette, Nestle and P&G may be unaffected.

  • The new cess on all taxes could have a material impact of about 4-5 per cent on profits of ITC, based on 2003 numbers, given its high excise and tax incidence. Colgate-Palmolive India and GlaxoSmithKline Consumer could also face about a 2-3 per cent impact on their profits from the cess, based on their 2003-04 numbers. Godrej Consumer, Marico or Dabur may not face a material impact from the cess as they enjoy very low tax incidence because of manufacturing units situated in tax-free zones.

  • The plans of Britannia Industries, Godrej, Marico and Dabur to put up new capacities at Uttaranchal and Jammu can proceed unhindered, now that the tax exemptions for these areas have been retained until 2007. The gestation period for FMCG projects is typically at 6 months to a year. Therefore, other FMCG companies, too, will retain the flexibility to expand into the tax-free zones. The tax holiday to new units put up for processing fruits and vegetables could help Dabur India, Nestle India and Hindustan Lever, which have a significant presence in food processing.

  • The cut in excise duty on certain industrial oils which go into the manufacture of soaps from 30 to 20 per cent will ease the margin pressure on companies such as Godrej Consumer and Hindustan Lever, which derive a significant portion of their revenues from soaps. Rising prices of palm oil derivatives have forced some brands to take price hikes on a few of their brands in January.

    A further price hike would have been difficult given the tough price competition.

  • The excise duty exemption on beverages distributed through vending machines could help Nestle and Hindustan Lever price their out-of-home products more competitively, a positive, as both have big plans for this segment.

    But the immediate impact of this move will be marginal, given the small contribution to revenues.

    Aarati Krishnan

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