FMCG – Impact Negative As Excise Duty Hiked

Negative:

• Excise duty is increased to 12 per cent from the previous 10 per cent. The government in the previous budget had retained the rate at 10 per cent but this time it has increased the same by 200 basis points. The industry players did not expect the hike in excise duty as the same could create inflationary pressures. It is obvious that some of this price rise would be passed on to the customers which would again raise the prices of the products, thus creating an inflationary environment.
• No clear guidance on goods and service tax (GST) is not good for the sector. If the GST would have been implemented the distribution cost of the FMCG companies which range approximately in the range of 2 to 7 per cent of the turnover would have been come down. 
• Further, no clear guidance was given on the allowance of FDI in multi-brand retail up to 51 per cent. The budget stated that efforts were made to arrive at a broad-based consensus in consultation with the state government in respect of the decision to allow FDI. If the FDI were allowed it would further help the retail space which in turn would have been beneficial to FMCG players. 
• Excise duties were increase in case of tobacco products against the expectation of retaining them at the same level. Excise duty on hand-rolled bidis has been increased from Rs 8 to Rs 10 per thousand and on machined-rolled bidis from Rs 19 to Rs 21 per thousand. The excise duty has also been increased for goods like pan masala, guthka, chewing tobacco, non-manufactured tobacco and zarda-scented tobacco. Despite the hike in excise duty the ITC scrip closed in the green zone, up 3.65 per cent. This may be due to the pricing power which ITC holds in the market.   

• The target for agriculture credit limit has been raised by Rs 1,00,000 crore to Rs 5,75,000 crore in 2012-13. The increase in credit was demanded by the industry and was fulfilled. The increase in credit will allow the farmers to have easy access to funds which would further increase the crop production. 
• Further, the FM retained the interest subvention scheme for providing short-term crop loan to farmers at 7 per cent interest rate. An additional subvention of 3 per cent will be available to prompt paying farmers.  
• The budget also allocated Rs 20,000 crore under the Rural Infrastructure Development Fund (RIDF). Of this Rs 5,000 crore is earmarked exclusively for creating warehousing facilities. The move will further reduce the supply side bottleneck which fuels inflation. Also, better warehousing facilities will protect the crop or grains from getting destroyed.
• The exemption limit for the general tax payers is proposed to be enhanced from Rs 1.8 lakh to Rs 2 lakh, giving tax relief of Rs 2,000. Further, the upper limit of 20 per cent tax slab is proposed to be raised from Rs 8 lakh to Rs 10 lakh. The additional income generated from this would again be spent by the individuals, benefitting the FMCG companies.

Overall we believe that the budget would have a negative impact on the sector. The BSE FMCG closed today with an increase of 1.91 per cent mainly on account of ITC which closed higher by 3.65 per cent and has weightage of 54.22 per cent in the index. Other stocks like Nestle, Colgate Palmolive, Tata Global Beverages closed on the lower side in the red zone. It was quite obvious that the government would spend higher for development of the rural market. We believe the increase in excise duty will have an impact on the companies’ margins as they would not be able to pass it on to consumers. Further, there may be some inflationary pressures which would leave the economy grappling for any concrete directions.