FOCUS: FMCG cos may not pass on excise cut, to prefer upping margin.

[K.Karthik Raja]

FOCUS: FMCG cos may not pass on excise cut, to prefer upping margin.
MUMBAI - Fast-moving consumer goods companies are unlikely to pass
on the excise duty reduction benefits to consumers, and may instead
use the opportunity to shore up margins, analysts said.
"Our interaction with companies after the Budget has led us to
believe they are unlikely to cut product prices, as they are facing
inflationary pressure on raw material prices," said Sameer Deshmukh,
senior analyst at IL&FS Investsmart.
"In the recent past, companies had to settle for only a marginal
price
increase despite major hike in input costs, as they did not want to
take a chance on impacting volumes," he added.
Analysts expect that FMCG companies may, however, safely defer the
next price hike led by cost inflation, due to the relief offered in
the Budget. Friday, the government announced a reduction in general
excise rate to 14% from 16% now.
It also cut excise duty on paper and packaging to 8%, and exempted
tea and coffee mixes, dairy product inputs and packaged coconut water
from excise
duty.
Key beneficiaries of the excise duty reductions are Britannia
Industries,
Hindustan Unilever Ltd, Marico Ltd, Dabur, and Tata Tea Ltd.
"ITC will also gain from these duty cuts, but the impact will be
neutralised by the hike in excise duty on non-filter cigarettes," said
Unmesh
Sharma, analyst at Macquarie Securities.
.
DEMAND BOOSTERS
The 600-bln-rupee debt relief package that the government has
announced
for farmers is also seen auguring well for consumer companies, as it
will
boost rural income, and put more disposable income in the hands of
farmers.
"Rural households are more likely to spend their disposable income
on
personal care products, which will boost volume sale of companies hike
Hindustan Unilever, Marico, and Godrej Consumer Products,"
The move to cut income tax liability will have a beneficial impact
on
consumption demand, but it will be more towards the consumer durables
industry, said analysts.
"If a person finds himself saving of 45,000 rupees a year, he is
more
likely to buy a consumer item like a plasma TV or an air-conditioner,"
said
Deshmukh.
"I do not expect consumers to uptrade on personal care products to
the
extent of 45,000 rupees a year," he added.
In the FMCG space, urban consumers are more likely to spend more
on food
products and dairy product, while rural consumers are seen buying
laundry and
personal care products, analysts said.
.
CIGARETTES
Cigarette manufacturers such as ITC, VST Industries, and GTC
Industries
are likely to be hit in varying degrees, by the hike in excise duty on
non-filter cigarettes to bring them at par with the duty currently
applicable
on filter sticks.
In case of ITC, non-filter sticks constitute 20% of total
cigarette
volumes, while for GTC and VST, it is much more, at around 50%.
The excise duty revision translates into 140% and 400% increase in
the
excise duty on cigarettes of up to 6 cm, and more than 6 cm
respectively,
said Sharma.
"We forecast an 11% average increase in prices, and a 4% decline
in
volumes in third quarter of FY09 (Oct-Dec)," said Sharma.
Deshmukh, however, factors in a weighted average price increase of
7.5% in
cigarettes.
"We believe ITC will hike prices of filter sticks instead of non-
filter,
as it is primarily bidi consuming class that up-trades to non-filter.
Any
hike there will be detrimental to the market share," said Deshmukh.
While ITC is expected to witness short-term pressure, the stock is
attractive for the long term, said Deshmukh. He has maintained "buy"
rating
on the stock with a price target of 267 rupees.
UBS and Morgan Stanley have, however, reduced their rating on the
stock,
while
Macquarie Securities has maintained the rating but cut price target
and
earnings estimates.
Shares of ITC today ended down 5% at 192.55 rupees on National
Stock
Exchange.
GTC closed down 10% at 450.65 rupees, and VST ended flat at 350
rupees.
.
HUL - BIGGEST BENEFICIARY
Hindustan Unilever is seen as the biggest beneficiary of the
2008-09
Budget.
Nearly 50% of its sales volume is led by rural sales. The debt relief
package will augur well for the company, as will the rise in
disposable
income of urban working class.
"HUL straddles the entire spectrum of price points, and will be
the first
to gain if rural household incomes increase," said an analyst at a
foreign
brokerage.
Its soaps, toothpaste, and detergent categories are seen doing
especially
well.
The company's tea and coffee portfolio will also benefit. In tea,
the
company sells iced tea and other flavoured tea mixes under the Lipton
brand,
while in coffee, it has Bru Regular and Bru Cappucino.
The excise cut in water purification devices to 8% from 16% will
also
provide a tremendous boost to Hindustan Unilever's newly launched
water
purification device Pure-It.
The other Budget proposals that will be positive triggers for the
company
are reduction in general excise, cut in central sales tax by 1%, and
excise
duty cut on packaging to 8%.
After trading at an intraday high of over 4%, compared with
Friday,
Hindustan Unilever shares today closed 0.2% higher at 227.780
rupees.