The rise in excise duty will have a negative impact on FMCG companies, which FMCG companies will pass on to consumer.
Budget imposed an additional ad-valorem excise on cigarettes, while keeping the fixed rate structure constant. The additional levy is at the rate of 10 per cent on 50 per cent of retail selling price (MRP), which effectively works out to 5 per cent of MRP. This additional levy is on cigarettes above 65mm of length, which covers almost the entire cigarette portfolio of ITC. ITC may go for medication of length of some of its lower-end brands (reduce the length to sub-65mm)
to avoid the additional levy on some part of its portfolio.
The increase in excise duty on bidis and cigarettes would narrow the price gap for cigarette products, which is positive for ITC. However, ad valorem imposition is a negative development for the cigarette industry.
The budget was neutral for the FMCG sector. Even, increase in tax slab will not yield much, as it will just give Rs 2000 more in the hands of consumer. Bad news is the rise in excise duty by 200 bps to 12 per cent will bring future margin pressure on FMCG sector, which is already under pressure due to input price inflation. But the sector will go for necessitate price hike.
