Pharmaceuticals, consumer electronics, fast-moving consumer goods and textiles companies are likely to report lower than expected sales and profits for the last quarter as well as for the year ended March 31, 2003, thanks to distributors and dealers, wary of the value added tax, refusing to lift stocks.
Normally, 10-12 per cent of annual sales take place in March. But dealers are preferring to maintain a zero inventory this time due to the prevailing uncertainty over the tax treatment of the closing stock.
An executive at Ernst & Young, which has helped leading companies liaise with state governments, said several top companies had reported 30-35 per cent lost business opportunities as a result of traders not lifting stocks.
Textiles: The position in the textiles industry is especially worrisome. The industry's strike continued for the eighth consecutive day in protest against VAT, Cenvat and the extension of the excise net to even the smallest of textile traders, weavers, spinners, yarn supplier and dealers.
All the processors in Tirupur, Surat, Bhiwandi and other centres around the country are currently on strike. "The entire textiles industry has come to a grinding halt. No one is lifting any material and the stocks at the manufacturers' level are piling up," Sudarshan Rao, proprietor of G Enterprise, the Mumbai-based textile processor, said.
A senior executive at a large industrial house that has interests in textiles said: "Inventory levels have shot up in March and in the first week of April. None of the processors and weavers is lifting yarn. All the textile mills -- cotton, polyester, viscose fibre -- have high stocks and sales are declining."
Pharmaceuticals: The pharmaceuticals industry is likely to report a 7-8 per cent drop in annual sales. The organised wholesale dealers of the pharmaceuticals industry have combined to oppose VAT.
"Moreover, since margins in the business are very high at 40 per cent, any sales decline will impact the bottomline significantly," sources at Ranbaxy Laboratories said.
Paints & Chemicals: Other industries that have been hit hard are paints and chemicals, FMCG and colour TVs and home appliances.
Executives at food and beverage companies like Pepsi and Coca-Cola argue that 'the VAT system may not be suited to India since 42 per cent of the business is distribution in nature.'
Sales of products like decorative paints were also hit in March, said ICI Ltd executive director M R Rajaram. He said sales of paint companies would be lower by 3-5 per cent in the year.
But, said Rajaram, the overall annual impact might not be so severe. "The overall working capital may be down 3 per cent, but the debtors would also be down 5 per cent."
Colour TV: The VAT agitation has also hit colour television producers who were not prepared for it as they had the World Cup in mind while planning production schedules. They had already bought more than 2.5 million picture tubes -- the sales target for the last quarter of the year is 2 million TV sets.
Though the sales targets were met, inventories piled up considerably as dealers refused to lift stocks. "Production planning is done in advance. Not that we had not anticipated this situation, but we had to be prepared for the World Cup. Our assessment is that since the primary billings slowed down, we lost a business opportunity of around 30 per cent in March itself," said S N Rai, general manager, logistics, LG Electronics India Ltd.
Suresh Khanna of Cetma, however, said that the primary billings were hit in the last 10 days of March by when the World Cup season was already over. The difference is that instead of the inventory pile up happening at the dealers' end, stocks piled up at the manufacturers end.
"But I do not think that the impact will be severe. It will be evened out in the coming months," he said. Nonetheless, as Rai pointed out, the impact on last year's financials will have to be registered in the books of accounts.
In the textiles industry, meanwhile, the strike was called by textile associations at even local levels to protest both VAT and the excise net covering traders and manufacturers with a turnover below Rs 1 crore (Rs 10 million).
Excise duty on textiles has so far been levied only on companies whose turnover exceeded Rs 1 crore (Rs 10 million).
In the industry, confusion also prevails as to whether Modvat will be available down the chain. "We don't know whether we will have to pay Cenvat, Modvat or excise duty at the central level and also whether this will have to be paid in lieu of sales tax," Rao said.
India has a large powerloom industry and its highly fragmented process makes it difficult to calculate VAT. According to industry observers, unlike composite mills where intermediary production processes between the yarn stage and the dyed/finished fabric stage is done in-house under one roof, the process is handled by different members of the powerloom industry.
