GST - FMCG: Lower tax may offer headroom to cut prices bl-premium-article-image

Radhika Merwin Updated - January 12, 2018 at 02:37 PM.

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For most segments within the FMCG space, GST brings good tidings on the back of lower tax incidence when compared to the total tax paid pre-GST. In particular, the household and personal care segment is likely to gain the most, with close to 5-7 percentage point reduction in indirect taxation.

Currently FMCG products such as soaps, toothpaste and hair oil are charged excise duty of 12.5 per cent plus state VAT of 13-14 per cent that varies across States. The effective overall indirect tax rate amounts to 24-27 per cent. With GST rates on each of these products fixed at a lower 18 per cent, companies within this space are likely to gain. The lower tax incidence offers headroom to lower prices and drive volumes, particularly in segments such as soaps and toothpaste, where there is intense competition.

While Colgate’s bread and butter business is toothpastes and oral hygiene products, Dabur derives 20 per cent of its domestic revenues from hair oils (Vatika) and toothpastes (Red, Meswak, Babool). Hindustan Unilever has presence across hair oils, soaps and toothpaste through several brands such Close up, Pepsodent, Lux, Lifebuoy, etc. Each of these players will benefit from the reduction in taxation under GST.

Besides, GST rate of 18 per cent on hair oil is a positive for players such as Bajaj Corp, Emami, Marico and Dabur. Growth in the overall hair oil category continued to be sluggish in 2016-17. Price cuts on the back of lower tax, post GST, can help companies such Bajaj Corp push up volumes.

Bajaj Almond Drops, the company’s key brand, grew by 3.2 per cent in value terms and 2 per cent in volume terms in 2016-17. Companies can also use the benefit to cushion any input price spikes in the near term or spend more on advertising.

For instance, Marico, had initiated price increase of 8 per cent in the latest March quarter to mitigate the impact of increase in inputs costs. GST can help the company reduce prices and push up volumes. However more clarity is required on the anti-profiteering clause, to see the extent to which the benefits can be retained.

While players in the competitive segments such as soaps and toothpaste may lower prices, those in the niche and premium segments such as household insecticides may not be compelled to pass on the lower tax benefit. Players such as Godrej Consumer can see margins inch up. Again, a lot will hinge on the implementation of the anti-profiteering clause. Rates on detergents and shampoos fixed at 28 per cent are higher than the current levels. Price hikes may come in from players such as Jyothy Labs, HUL and P&G in their detergents portfolio.

In the beverages category, rates on fruit juices and beverages containing milk are fixed at 12 per cent under GST. These rates are lower than that currently applicable. This may impact Dabur and ITC positively.

Published on June 24, 2017 15:29