WEB EXCLUSIVE: Budget impact on FMCG

The FM has attempted to pep up already strong demand, inflation and competition will have a higher bearing on financial performance of companies.
 
Indian FMCG companies have been major beneficiaries of robust consumption demand led by favourable demographics, rising income levels and increased urbanization. Overall sales growth of the companies has been strong despite continued high food inflation for past several months. The momentum witnessed by the rural economy has also helped to a great extent since rural India forms 40-50 per cent of total FMCG demand. 
 
However, rising input costs and heightened competition has dented profitability.  Though companies resorted to price hikes, they have been either with a lag or insufficient to cover escalated costs.
 
While the Union Budget 2011-12 has attempted to pep up demand, it has not addressed concerns of inflation though the Finance Minister expects average inflation to come down in next financial year.
 
Budget proposals
 
Proposal: Exemption limit for the general category of individual taxpayers enhanced from Rs 1,60,000 to Rs 1,80,000
 
Impact: Higher disposable income with consumers
 
Companies:  Positive for the sector
 
Proposal: Central excise duty maintained at 10 per cent
 
Impact: Amid high inflation levels, not raising excise duty has been welcomed.
 
Companies: Positive for the sector especially ITC as a single digit excise hike on cigarettes was strongly expected

Proposal: As a step towards roll out of GST, Constitution Amendment Bill to be introduced in this session of Parliament.
 
Impact: GST on implantation will reduce distribution costs and encourage the organised sector
 
Companies: Positive for the sector
 
Proposal:  Sops for the rural economy in terms of (a) higher credit flow for farmers from  Rs 3,75,000 crore to  Rs 4,75,000 crore (b) interest subvention enhanced from 2 per cent to 3 per cent for providing short-term crop loans to farmers who repay their crop loan on time (c) capital base of NABARD to be strengthened by Rs 3,000 crore in a phased manner in view of enhanced target for flow of agriculture credit (d) Rs 10,000 crore to be contributed to NABARD’s short-term Rural Credit fund (e) Indexation of the wage rates notified under the MGNREGA to the Consumer Price Index for Agricultural Labour.
 
Impact: Both, boost to agriculture and more employment opportunities will lead to higher incomes thus boosting demand
 
Companies: Players having strong foothold in rural markets such as Hindustan Unilever (HUL), Dabur , Godrej  and those which are increasingly focusing on rural markets such Nestle, Colgate and GlaxoSmithKline Consumer  
 
Proposal: Reduction in surcharge from 7.5 per cent to 5 per cent
 
Impact: Higher profits available as surplus
 
Companies: Positive for the sector
 
Proposal: Minimum Alternative Tax increased from 18 per cent to 18.5 per cent
 
Impact: No significant increase in effective taxation costs
 
Companies: Marginally positive for MAT paying companies such as HUL, Godrej and Dabur
 
Proposal: Removal of production and distribution bottlenecks for items like fruits and vegetables, milk, meat, poultry and fish through (a) Augmentation of storage capacity through private entrepreneurs (b) Fast Tracking of warehousing corporations (c) Eligibility of Capital investment in creation of modern storage capacity for viability gap funding
 
Impact: Will help improve supply and in turn inflation
 
Companies: Positive for the sector and especially food and related companies such as HUL, ITC, Nestle, GSK SmithKline Consumer Healthcare
 
Proposal: Allocation of cumulative Rs 1,200 crore to help higher production of pulses, palm oil, vegetable, bajra, jowar, ragi and other millets
 
Impact:  Will help improve domestic supply of above items and hence control inflation
 
Companies: Positive for the sector and especially respective food companies mentioned above
 
Sector outlook
 
The Finance Minister expects Indian economy to grow in the range of 8.75-9.25 per cent in FY12, which is higher than 8.6 per cent estimated in FY11. Further, he has given a fillip to already strong demand by increasing tax exemption limits and providing sops for the rural economy. However, continued high food inflation, crisis in West Asia, rising trend of input costs and competition would continue to have a higher bearing on the companies’ stock performance.