AFFORDABILITY TO SPUR BUYING POWER IN RURAL AREAS
In the FMCG space, rural demand is yet to pick up. The industry believes that the new rate revision will act as a trigger for improving consumption and customer sentiment. Analysts expect FMCG stocks to do well in the coming quarters as they post better growth numbers.
As many as 178 items of daily use, including detergents, chocolates, chewing gum, shampoo, deodorants, shoe polish, nutritional drinks, dental hygiene products, polishes and creams were shifted from the top tax bracket of 28 per cent to 18 per cent during the recent GST rate rejig. The tax rate on condensed milk, refined sugar and curry paste has been cut from 18 per cent to 12 per cent.
“Reduction in daily consumption items such as detergent, dish wash etc. is a welcome change. This will help enhance consumption and improve customer sentiment considerably. Prior to GST implementation, the tax slab for Jyothy Labs was at 21 per cent and post GST it has come down to 17 per cent, a reduction of 4 per cent points which will be passed on to the consumer in its entirety. This move will also add a further uptick in the rural demand which showed signs of improvement in Q2,” said Ullas Kamath, joint managing director of Jyothy Labs.
“Due to the easy GST compliance processes by the government, we will also see a lot of unorganised players shifting to the organised sector leading to healthy competition and more choice for the consumers,” he added.
“Most of the companies will pass on the benefits of rate reduction to the customers and will be one key factor in the recovery of demand in Q3, especially in the rural markets. Mass market products like detergents, shampoos and toothpaste will benefit. Two consecutive good monsoons and increase in the minimum support price of some of the agri-commodities have been helping the recovery. The confusion in the trade channel, especially among wholesalers is being resolved,” said Kaustubh Pawaskar, research analyst, Sharekhan.
According to Naveen Trivedi, assistant vice president of Institutional Equity at HDFC Securities, among the key benefits, this move will increase affordability of consumers, as a large portion of the reduction in rates would be passed on to them.
In many of the products, the preGST rate was higher than the current rate. Shampoos, deodorants, beauty care products, air freshners and detergents were taxed at 25 to 26 per cent before GST. They have now come down to 18 per cent. The companies that enjoy this rate benefit can pass on the benefits to the consumers. Some of the companies which were thinking on a price hike due to higher commodity prices, can go for it without worrying about the consumption. The rate reduction will increase the pricing power of companies.
“We remain committed to making our products more affordable and accessible for the mass population, thereby driving consumer demand. In many of our categories, penetrating rates are low and so, the headroom for growth is significant,” said Godrej Consumer Products spokesperson.
Lower rates will incentivise consumers to upgrade to branded products from the unbranded as the price differential will be lowered. For those using mass market branded products, this will give a push for ‘premiumisation’ as consumers can upgrade to premium segment when products become more affordable, said Trivedi.
A shift among FMCG players from unorganised to organised business is also likely. For unorganised FMCG companies a reduction of 10 per cent in tax rate will be an incentive to come into the tax bracket.
According to Trivedi, in the FMCG space, Hindustan Unilever would be the key beneficiary, as 60 per cent of its revenues will now fall under 18 per cent rate. Earlier, products that account for 45 per cent of the revenues were in the 28 per cent tax bracket. HUL can maximise the rate revision benefits in its detergent portfolio. HUL’s pricing power would increase and the company can push consumers to upgrade, he added.
“HUL will be delighted to pass on the net benefits at the corporate level to the consumers,” the company said.
HUL shares moved up from Rs 1,236 to Rs 1,295 in the past few sessions. HDFC Securities estimates that the earnings of HUL will increase by three per cent and it has raised the target price of the stock to Rs 1,458 from Rs 1,401.
The new rate has impacted products accounting for 20 per cent of Emami’s revenues. HDFC has raised the target price of Emami as well. “There is still one thing which needs to be clarified in terms of the exemptions which were earlier available in the north-east and other areas. Those have been truncated dramatically and there is still not clarity on how much will be refunded and that is important for the industry to understand,” said the company.