Budget Delivers Contrary View - Consumer Durable

In past, Indian consumer Durable Industry was facing pressure on their margin due to higher input cost coupled with the rupee depreciation. Also with high interest rate regime the Industry faced muted to sluggish growth as the consumers usually postponed their plans to buy the luxury items. The Industry had high expectation from the Budget of which some were full field while others were not. The following are the key budget highlights with respect to the Consumer Durable space which should be considered:

Negatives:

Budget proposed to Increase the excise duty from 10 per cent to 12 per cent. This would increase the cost of manufacturing which will impact the companies. Operating in a highly competitive environment, the companies would try to pass on less of this cost to the consumers.

Also increase in Service Tax from 10 per cent to 12 per cent would further impact the companies after sales services which consumers usually prefer to avail. This would again increase the overall cost of the product and services affecting the consumers.

The budget proposed to increase custom duty on import of gold from 2 per cent to 4 per cent. Also it levied an excise duty of 1 per cent on branded precious metal jewels to be extended to include unbranded jewels.  According to Mehul Choksi CMD of Gitanjali Gems, this move will have a nominal impact on prices and will not affect jewellery demand. 

Positives

• Full exemption from basic custom duty is been provided to LCD and LED TV Panels of 20 inches and above and also on Mobile Phones parts.
• To promote investment in research and development, it is proposed to extend weighted deduction of 200 per cent for R&D expenditure in an in house facility beyond 31st March 2012 for a period of five years. This move will have more research in the country which could benefit the Industry with innovative products and new technology.
• Branded silver Jewellery has been exempted from excise duty. The move is positive however demand for silver jewellery is comparatively lower than of gold jewellery.

Conclusion:

We believe the overall impact on the sector would be Neutral. BSE Consumer Durables Index fell 0.54 per cent and also the stocks for the same closed in the negative territory. Titan closed 0.28 per cent lower; Videocon Industries closed 1.02 per cent lower while jewellery stocks namely Rajesh Export and Gitanjali Gems closed lower. The Budget delivered a contrary view for the sector i.e. on one hand it raised the excise duty and on the other it promoted investment in R&D activities. However one must adopt a wait and watch approach for the sector and take a cautious call before getting into the same.