|
Indian Budget 2007-08 - Part I - Fast Moving Consumer Goods (FMCG)
By Dr. Uday Lal Pai
Exclusively for InvestorIdeas.com
posted March 26, 2007
The India Budget 2007-08 (the country follows April-March fiscal year in its financial system) is mildly positive for growth. It points out that growth in the economy was of 8% for the previous year and this is likely to continue this year too. The budget has expressed satisfaction on high growth seen so far.
advertisement
Inflation continues to be highlighted as a source of concern. So the short-term focus is clearly inflation control, which is evident from further cuts in customs duties.
In India, politics comes first and economy takes the last seat. The economic growth in India (one of the fastest growing GDP in the world) happens by default, some observers say. The government wants to push populous budget, draining the nations resources in view of vote-bank politics. So it is understandable as to why the finance minister (FM) played safe by not moving forward on reforms. The next budget will be too close to the elections; making any major reform measures unlikely.
However, there have been some beneficiaries from the Budget such as the oil sector as excise on petrol and diesel has been reduced. The others to benefit from the Budget include pharma, FMCG, healthcare, packaged foods, logistics, hotels, engineering and power firms. This article examines few of those sectors in depth.
Fast Moving Consumer Goods (FMCG)
The Budget gives more focus on the agricultural/farm sector that will boost the rural income thus providing better growth prospects to the FMCG companies. With 12.2% of the world population living in the villages of India, the Indian rural FMCG market is something no one can overlook. Better infrastructure facilities will improve their supply chain. Also, with rising income and growing consumerism, FMCG sectors are likely to benefit. Growth potential for all the FMCG companies is huge as the per capita consumption of almost all products in the country is amongst the lowest in the world. Further, if these companies can change consumer's mindset and offer new generation products, they would be able to generate higher growth in the future.
Budget Measures
Farm sector has been given the top priority. Agriculture investments to go up to 2% of GDP.
Duty on edible oil has been reduced.
Excise duty exempted for all food mixes and biscuits. Custom duty on Sunflower oil (crude and refined) reduced by 15 per cent while exempted from additional CV duty of 4 per cent Customs duty on food processing machinery and their parts is being reduced from 7.5% to 5% Excise duty has been fully exempted on biscuits of per kilogram. Excise duty on food mixes, including instant food mixes, has been reduced from 16% or 8% to Nil.
Free samples and displays are exempt form the purview of FBT. Footwear - Excise duty on parts of footwear reduced from 16% to 8%.
Venture capital investing in dairy industry will get a pass through status.
Better rural infrastructure development to be an area of focus. Increase in dividend distribution tax from 12.5% to 15%. 1% higher education cess to charged.
The dividend distribution tax on dividends paid by money market mutual funds and liquid mutual funds increased to 25 % for all investors. No implementation of value-added tax (VAT) on cigarettes. Specific excise duty on cigarettes increased by about 5%.
Budget Impact
The focus in agriculture will benefit rural income that in turn will help FMCG companies Thrust on Increased investment in agricultural activities and rural infrastructure would be positive for the sector.
Increase in spending towards upliftment of rural populace to lead to increased demand for durables in the long term. CST reduction expected to lower manufacturing costs of FMCG players. Reduction of excise on food mixes is beneficial to ITC, as this segment is a new growth area.
FMCG companies spend a lot of money on advertising and brand building.
Exclusion of samples and displays from FBT will help them in promoting their products. Better infrastructure will help better access and more distribution network to the FMCG companies. It will help them improve the supply chain. Companies have huge investments in the liquid funds, the higher tax on dividend distribution will reduce their other income. The impact of higher tax (cess) on the industry is likely to lower net margins, albeit marginally. Also all the FMCG companies will benefit from the infrastructure development funds that will boost to rural income.
Companies to watch
Major beneficiaries are HLL, Marico, Dabur and ITC.
Britannia and ITC are likely to benefit due to reduction in excise on biscuits. ITC will also benefit from the reduction of excise duty on instant mixes. Duty reduction on edible is a positive for companies like Marico. Exemption of excise on biscuits is positive for Britannia, ITC and Parle. Positive for cigarette companies like ITC, Godfrey Phillip, VST.
Positive for footwear companies like Bata, Liberty Shoes and Mirza International.
Disclaimer
Dr. Uday Lal Pai is an independent columnist for this web site.
Dr. Uday Lal Pai may hold long or short positions in any of the stocks mentioned in this article and those positions can change at any moment. InvestorIdeas.com Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp, InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
Dr. Uday Lal Pai is a freelance writer. Nothing in the articles should be construed as an offer or solicitation or recommendation to buy or sell any specific products or securities. Past performance does not guarantee future results.
|
