FMCG: Focus on agriculture and investments in rural areas

Industry Expectations 

• Increase in personal income tax slab to generate higher disposable income.

• Increase in tax incentives under section 80C to benefit working class

• Moderate rise in excise duties on cigarettes

• As a result of a taxation policy targeting the cigarette segment cigarettes, the illegal cigarette segment comprising both contraband (customs duty evaded) and excise duty evaded domestic industry continued to grow and at 23 billion sticks currently accounts for nearly 20% of the total cigarettes sold in India.
• Excise duty hike for cigarettes could be lower given sharp volume decline in FY15 and FY16 and no increase in collection despite high tax increase

• Initiatives to agriculture sector for reviving growth and increased focus on investments in rural areas

• The government could significantly raise food subsidies, and spends on MGNREGA. Any increase in rural spending/infrastructure spending/tax exemption which can put money in hands of consumers will indirectly benefit FMCG sector

• Outlining of reduction in corporate tax rate from 30% to 25% will benefit full tax paying companies

• Clarity with regards GST implementation

In order to align with Goods and Services Tax, excise rate may go up for some categories with low excise duty (like edible oil, jewellery and apparel).

• Service tax: Any further sharp increase in service tax will have a near-term impact on quick service restaurant players like Jubilant FoodWorks and Westlife Development, but if corporate tax rate is reduced it could offer some relief.

• Roadmap on relaxation in corporate direct tax slabs

In the previous Budget, it was announced that there will be a reduction in corporate tax rate over the next four years from 30 per cent to 25 per cent  which is a positive for consumer companies paying close to peak tax and there will be compensation in some cases where indirect tax exemptions have gone away.

Any roadmap on the same will be very useful.

Industry Overview

Growth of Fast-moving consumer goods companies slowed down considerably.

Multiple factors, including rural weakness, delayed onset of winter and market share losses impacted the growth.

Most of the companies have report slowing rural growth rate due to poor rainfall, lower MSP and decline in allocation to schemes like MGNREGA. Rural demand remains challenging and pace of growth has slowed down considerably.

Both rural and urban market growth rates have now converged.

FMCG industry growth was driven by volume.

Fall in crude oil prices helped the company for gross margin expansion.

But the heavy spend on Advertisement and Promotion held back some of the benefit of gross margin.

FMCG companies are facing problem in growing its volume growth for sometime now.

Analyst expectations

Given the two successive poor monsoons and the general stress in rural India, we believe there will be a tilt towards schemes supporting agri related schemes and rural infra.

We expect government would look at increasing personal tax slab.

Given the decline in cigarette consumption over the past year, we expects a modest rise in excise duty.

Stock to watch

Marico, Dabur, HUL, ITC, GCPL, Jyoti Lab

Outlook

Rural growth has slowed down further impacted by weak monsoons and expectations of recovery hinge largely on stimuli-led pickup.

The government could significantly raise food subsidies, and spends on MGNREGA will have a positive impact on companies with greater rural exposure.

In the upcoming Budget, if government announces hike of 10-15% in excise duty by on cigarette, it may put further pressure on the already stretched price elasticity.

Outlining of reduction in corporate tax rate from 30% to 25% will benefit full taxpaying companies.

Read our complete Budget coverage