AF­FORD­ABIL­ITY TO SPUR BUY­ING POWER IN RU­RAL AR­EAS

Financial Chronicle - - DEEP DIVE - SANGEETHA G

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.

BEN­E­FITS

“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.

REV­ENUES

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.

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