FMCG sector will benefit from measures taken to negate food inflation pressure on common man and also measures to boost disposable income.
Current status
The FMCG sector saw new launches, re-launches and acquisitions in 2010 contributing to the sector's phenomenal top-line growth of 15% led largely by volumes. But the year also saw some near term challenges like inflation and irregular monsoon, which impacted its margin and profitability harder.
The rise in raw material costs took a toll on the operating margins across companies, with margins contracting by approx. 200 bps to 500 bps. The increasing competition among players also resulted in greater Advertising & Promotion (A&P) expenses of majority FMCG companies barring a few.
To tackle the input cost pressure, the have already taken price hikes or are planning to rise prices to protect margins from erosion.
FMCG sector also saw lots of acquisitions in other emerging as well as developed markets, which would also be earnings accretive in the long run. The sector is likely to perform in medium to long term as favourable demand scenario.
Industry expectations
Focus on the rural areas to continue. Sustained focus on agriculture growth. Direct subsidy to farmers to be reviewed.
Continued thrust and higher allocations to social and developmental programs - especially MGNREGA.
Increase in tax slabs for personal income tax.
No change in Cenvat rate, considering the high inflation and rising input prices.
No increase in excise duties for cigarettes, given strong increase last year.
Full exemption from excise duty for packaged water from current 8% and biscuit, which has currently 4% duty. Also full exemption on sanitary napkin from 10% level.
Reduction in excise duty on sugar confectionary from 10% to 4% and condensed milk from 10% to 4% - 8%.
Increase in service tax from 10% to 12%.
Reduction of MAT rate - currently applicable at 18%.
Reduction in dividend distribution tax from currently 15% (1.66% surcharge + education cess) to 10%.
Roadmap for FDI in retail sector.
Roadmap for implementation of DTC and GST.
Analysts/market expectations
Higher allocations to social and development programs targeted for rural India - like Indira Gandhi Vikas Yojana, NREGA, Bharat Nirman, Indira Awas Yojana and Krishi Vikas Yojana.
We believe the excise duty on cigarettes may remain unchanged or may be marginally rise in this Budget after a 15% increase in the effective excise rate in the last Budget.
Cenvat rate to increase from 10% to 12% - full rollback of fiscal stimulus granted in FY09-10.
MAT increase may happen as it could be a step towards direct tax code.
Stock to watch
Hindustan Unilever, ITC, Godrej Consumer Products, Britannia Industries, Marico
Outlook
The Indian fast moving consumer goods (FMCG) sector with a market size of Rs 130,000 crore is the fourth largest sector in the Indian economy.
The sector has grown at a CAGR of 11% over the last decade and is expected to sustain the strong growth on the back of strong domestic consumption in the long run.
Robust GDP growth estimated at 8.75% in FY11, increased income in rural areas, growing urbanisation and changing lifestyle of consumers would be key growth drivers for companies.
However, the high food inflation and the surging input cost are likely to affect its growth in the near term. Hence, we expect the government to provide some support to the sector in the upcoming budget.
