When Reserve Bank of India Governor D Subbarao said last week that India’s Inc pricing power had declined, he wasn’t off the mark. The Budgetary proposal to raise excise duty by two per cent this year will see product prices shooting up, but not substantially.
FMCG (fast moving consumer goods) and durables companies say the effective price rise following the increase in excise duty will be lower than two per cent — at about 1-1.5 per cent only. And, most will not kick in immediately. Durables companies are likely to take up prices only by next month, while FMCG companies are likely to be even slower on the pricing front.
“We are price followers, not leaders,” says A Mahendran, managing director, Godrej Consumer Products Ltd. “I don’t expect the hikes to kick in rightaway.”
Dabur India says the company is still working out the exactness of the price rises. “We will have some clarity going forward,” according to its spokesperson.
Videocon Industries director Anirudh Dhoot says his company will take up prices after April 15. LG also says it is assessing the quantum of price hikes to be taken. “It won’t be immediate,” according to the L K Gupta, the company’s chief marketing officer. Samsung’s vice-president home appliances Mahesh Krishnan also echoes a similar point on price hikes.
Beverage major Coca-Cola India says price hikes will be taken on larger packs, not on entry-level products. “The excise hike comes at a time when the industry is gaining momentum,” notes a company spokesperson. “We will weigh our options and pass on a part of the increase.”
PepsiCo India was not immediately available for comments.
But analysts say that a reason for this cautious approach to pricing is because companies do not want volume growth to be impacted. This is especially true for FMCG companies where volume growth has been in the region of 9-15 per cent in the last few quarters. Price-led growth, on the other hand, has only been 5-10 per cent. The impact on FMCG company margins has been limited in the last few quarters — it is down by about 100-200 basis points —mainly on account of prudent cost management by most companies.
But durable companies have not been so lucky. Their margin decline, according to analysts, has been over 200 basis points in the last few quarters. Just how much they have been able to pass on in terms of price hikes can be gauged from this: When the rupee slid to Rs 53 from Rs 44 between August 2011 and January 2012, durables companies raised home appliance prices by just about five-seven per cent, that too, over two to three rounds.
From February this year, durable companies have begun feeling the pinch once again on account of rupee depreciation (the rupee has slid to Rs 50 from Rs 48), but have resisted taking up prices so far. George Menezes, chief operating officer of Godrej Appliances, says it is no more possible to resist price hikes in the face of rupee volatility, commodity inflation, and now, excise hike. “We will have to act, but the price hike will be measured,” he says.
