FMCGs: Await­ing a turn­around

Prof­itabil­ity pro­jec­tions vi­tal for stock prices, Tier 2 and 3 towns suf­fer from lack of clar­ity on GST

Financial Chronicle - - DEEP DIVE - RITWIK MUKHERJEE

The GST Coun­cil, which met on Novem­ber 9 and 10 and de­cided to cut the rates on three-fourths of the 200 items in the peak 28 per cent tax bracket to the lower GST bracket of 18 per cent, re­tained cer­tain prod­ucts like air con­di­tion­ers, wash­ing ma­chines, paints and ce­ment in the high­est bracket. White and brown goods man­u­fac­tur­ers and com­pa­nies en­gaged in the con­sumer durables busi­ness al­ready in­di­cated that pri­mary sales had been im­pacted by de-stock­ing by deal­ers, postGST, while pri­mary sales re­mained strong and, in fact, ben­e­fit­ted from lu­cra­tive of­fers ex­tended by re­tail­ers.

For com­pa­nies like Voltas, air con­di­tioner (AC) sales (at sec­ondary level) grew by 15-17 per cent driven by dis­counts of­fered by re­tail­ers, just prior to im­ple­men­ta­tion of GST. The growth mo­men­tum was par­tially off­set by un­sea­sonal rain­fall in south­ern In­dia, com­pany of­fi­cials said. These com­pa­nies think that the ac­tual im­pact of GST on pri­mary sales is likely to pan out for a few more months.

IM­PACT

Mar­ket an­a­lysts think that any mod­i­fi­ca­tion in costs would have some im­pact on re­ten­tion and, by ex­ten­sion of this logic, the stock prices of com­pa­nies. GST and the uni­fied tax­a­tion struc­ture it has promised to usher in re­mains crit­i­cal for white goods man­u­fac­tur­ers from that an­gle. The im­por­tant ques­tion here re­lates to GST's im­pact on their costs. ACs, re­frig­er­a­tors, wa­ter pu­ri­fiers and sundry other items that make up this space are di­rect ben­e­fi­cia­ries of ra­tio­nal­i­sa­tion of costs, if any, fol­low­ing the in­tro­duc­tion of GST in its lat­est avatar.

White goods mak­ers are keen to lever­age the new cost struc­ture to their ad­van­tage, a point that in­vestors must note in their bid to take fresh po­si­tions, an­a­lysts felt.

“The poser that nat­u­rally fol­lows is whether these com­pa­nies will gain in terms of com­pet­i­tive­ness too. This is­sue, I must say, can't be ad­dressed right away. It will take at least three or four quar­ters to ad­dress it suf­fi­ciently well. White goods com­pa­nies, bar­ring a few, are ex­tremely com­pet­i­tive, which is of­ten re­flected in fierce pric­ing strate­gies, which in turn af­fect their re­al­i­sa­tions. In this con­text, in­vestors would do well to keep an eye on in­put costs and re­alised prices of man­u­fac­tured goods,” said Ni­lan­jan Dey, di­rec­tor, Wishlist Cap­i­tal Ad­vi­sors.

Dey added, “Earn­ings vis­i­bil­ity will re­main a ma­jor in­di­ca­tor of in­vestor in­ter­est. Thus, prof­itabil­ity pro­jec­tions would play a vi­tal role on stock prices in the next few quar­ters. Whether a par­tic­i­pant would end up buy­ing Voltas or Lly­ods is not the sub­ject of de­bate here. But it would be per­ti­nent to note that choice would de­pend on liq­uid­ity, earn­ings es­ti­mates, prod­uct vis­i­bil­ity and the like. Any ra­tio­nal and uni­form tax would be wel­come in the con­text of white goods pro­duc­tion. To what ex­tent is such tax be­ing passed on to con­sumers? In­vestors would at­tempt to an­swer that ques­tion in the days ahead.”

Al­though the fes­tive sea­son was rel­a­tively bet­ter, the white and brown goods in­dus­try had ini­tially been grap­pled with is­sues such as de-stock­ing by deal­ers and dis­rup­tions in pri­mary sales. In­ter­est­ingly, the fes­ti­val sea­son tra­di­tion­ally con­trib­utes 5060 per cent of these com­pa­nies’ an­nual sales. Af­ter de-stock­ing by stock­ists in May and June, in­dus­try sales con­tracted in July 2017 (down 2.4 per cent) on ac­count of op­er­a­tional is­sues, es­pe­cially re­lated to upgra­da­tion of soft­ware by whole­salers which con­strained billing to a large ex­tent. In con­trast to sec­ondary sales, the pri­mary sales were even weaker. Most of the com­pa­nies wit­nessed high sin­gle digit to dou­ble-digit de­cline in sales in In­dia busi­ness dur­ing that time. Some com­pa­nies tried to make it up with sales growth through of­fer­ing heavy dis­counts.

While the tran­si­tion in big­ger ci­ties and met­ros might have been smooth, there are still a large num­ber of re­tail­ers in tier-2 and tier-3 ci­ties who are fac­ing un­cer­tainty or lack of clar­ity re­gard­ing GST, these com­pa­nies pointed out.

Com­pa­nies like Whirlpool of In­dia ad­mit­ted hav­ing seen some dis­rup­tion, due to de-stock­ing by deal­ers dur­ing the pre-GST pe­riod. How­ever, the in­ven­to­ries with deal­ers and dis­trib­u­tors got re­stored to their orig­i­nal lev­els be­fore the fes­ti­val sea­son, it said.

GROWTH

Some of the com­pa­nies think that there is no rea­son why in­dus­try should not look for­ward to a strong growth pe­riod. The fac­tors, which acted in favour of in­dus­try, in­cluded a nor­mal mon­soon, which pushed up agri­cul­tural out­put, which in turn pro­pelled de­mand in ru­ral ar­eas, the Cen­tre’s an­nounce­ment of a hike in HRA un­der the 7th Pay Com­mis­sion, which in­creased dis­pos­able in­come in the hands of Cen­tral gov­ern­ment em­ploy­ees. All these fac­tors acted favourably to­wards a surge in de­mand even in time of dis­rup­tions.

In­ter­est­ingly, in June 2017, sales of con­sumer durables shot up con­sid­er­ably be­cause of the un­cer­tainty among con­sumers about price re­vi­sions postGST. The ma­jor­ity of the sur­plus stock got cleared be­fore July 1, adding thereby a chunk of prof­its to re­tail­ers. How­ever, sub­se­quent to the roll­out from GST, sales of con­sumer durables fell.

A se­nior of­fi­cial of an­other lead­ing white and brown goods man­u­fac­turer, on his part, said that chal­lenges are far from over. “Re­tail­ers in smaller town and ci­ties are still grap­pling with var­i­ous nu­ances of GST com­pli­ance, the com­pul­sions of up­grad­ing their sys­tems, and tran­si­tional credit claims. Be­sides, dis­trib­u­tors and deal­ers have to con­tend with con­straints on cap­i­tal or cash that is locked in as they wait to re­ceive their claims in re­spect of their tran­si­tion stocks. This may have some im­pact on the propen­sity of smaller deal­ers and dis­trib­u­tors to stock up on in­ven­tory in the short term.”

Then there are com­pa­nies like Go­drej Ap­pli­ances that thinks that con­sump­tion re­cov­ery would have been faster and stronger if ap­pli­ances like wash­ing ma­chines, TVs, re­frig­er­a­tors, among oth­ers, had been kept in the 18 per cent tax slab in the GST regime. Home ap­pli­ances have be­come a ne­ces­sity and are no longer a lux­ury, the com­pany feels.

Af­ter de-stock­ing by stock­ists in May and June, in­dus­try sales con­tracted in July 2017 on ac­count of op­er­a­tional is­sues

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