Cost cuts
Input, packaging costs trimmed
Excise cuts to boost foods, ice creams
Rural impetus a big plus

Aarati Krishnan

With customs duties on inputs already at low levels and new manufacturing facilities in tax-free zones in place, FMCG (fast moving consumer goods) companies were not looking at the Budget for growth triggers.

But the measures that have been unveiled may turn out to be positive for earnings and help sustain the rural growth story for FMCGs.

Implications

Key soaps

, detergent and personal care inputs, such as surfactants, fatty acids, soda ash and petrochemical derivatives will now attract a lower import duty of 12.5 per cent, compared to the earlier 15 per cent.

Companies such as Hindustan Lever, Godrej Consumer and Colgate Palmolive, buffeted by the impact of rising crude prices over the past year, may see higher profit margins.

The reduction

in import duty on key packaging materials is likely to reduce packaging costs, a key cost element for all FMCG majors.

Categories that derive a substantial chunk of revenue from low-unit and sachet packs, such as shampoos, detergents and toothpaste, will be key beneficiaries and may witness margin expansion.

Hindustan Lever, Colgate, Dabur and Marico appear to be ones that will gain.

The cut

in excise duty from 16 to 8 per cent on ready-to-eat foods could reduce the manufacturing costs of these offerings and lead to lower retail prices for ITC (the Aashirwad range) and its unlisted competitors.

The ready-to-eat market is in its nascent stage. Lower selling prices could help drive market expansion, if companies decide to pass on the duty cuts to consumers.

Both Hindustan

Lever and unlisted competitors, such as Gujarat Cooperative Milk Marketing Federation, will gain from the excise duty exemption on ice creams (currently at 16 per cent).

The business currently accounts for a minuscule proportion of Hindustan Lever's revenues. But a lower cost structure could help reduce prices and drive market expansion.

Dabur India

could receive a boost to its food business from the priority-sector status for fruit and vegetable processing.

The hike in the import duty on honey from 30 to 60 per cent may provide greater protection and boost the company's branded honey business.

Tax proposals apart, the Budget appears to contain the right mix of ingredients to keep the rural growth story going.

In categories such as shampoos, soaps, toothpaste and hair oils, growth rates in rural demand have raced ahead of urban offtake in the recent months.

With allocation of more funds to expand rural credit, increase in coverage to more farmers and sprucing up rural infrastructure, incomes could receive a boost.

Investments in rural irrigation and water supply projects may, at the same time, help to de-sensitise the rural economy from sharp monsoon-related swings.

This will certainly be good news for companies such as Hindustan Lever, Colgate Palmolive, Nirma and Dabur that have a significant rural footprint and are looking to rural consumption trends for revenue growth.

(This article was published in the Business Line print edition dated March 1, 2006)
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