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FMCG: Slowed down by excise hike

Krishnan Thiagarajan

THE rationalisation of the excise duty structure in the Union Budget for 2000-01 has dealt a severe blow to the stock prices of FMCG companies. By hiking the excise duty rates on a majority of FMCG products at a time when several product categories are i n the midst of a demand slowdown, the Budget has made life tough for manufacturers who will find it difficult to pass on the hike to the final consumer.

The contraction in rural disposable incomes resulting from the substantial setback to agricultural production would only add to woes. However, since each of the FMCG segment is dominated by just a handful of players, a coordinated effort by manufacturers to pass on the duty hike to final consumers cannot be ruled out.

Toothpastes, biscuits, cakes, confectionery, and biscuits carrying an excise duty of 8 per cent at present will now be subject to a duty at 16 per cent. The duty has now been labelled as Central Value Added Tax (Cenvat) and may now be levied on a slightl y different basis from the earlier excise duty.

However, given the quantum of increase, the incidence of tariff is likely to be higher than before. Fruit juices, jams and jellies and soups, earlier subject to 8 per cent excise duty, will now be taxed at 16 per cent.

Britannia Industries: The stock price of Britannia Industries has slipped by Rs. 230.45 to settle for the fortnight at Rs. 470. Britannia Industries, which derives over 80 per cent of revenues from biscuits and cakes, is likely to face an escalation in i ts cost of production. Since the company has been striving to expand volumes through low-priced biscuits targeted at mass markets, the price hike could meet with demand resistance.

Nestle India: The stock price of Nestle India has continued on its downtrend following the Union Budget, declining by Rs. 103.45 to settle at Rs. 299.50. The decision to levy excise duty on a range of processed food products such as jams, jellies, fruit juices and soups based on the maximum retail price and the hike in excise from 8 per cent to 16 per cent could impact the profitability of the company.

The marginal reduction in the effective import duty rates on cocoa powder from the earlier level of 40 per cent to 38.5 per cent (after surcharge), may benefit Nestle (as well as Cadbury India), given that it comes in tandem with a sharp decline in inter national cocoa prices over the past one year.

Colgate Palmolive: The stock price of Colgate Palmolive has declined by Rs. 23.15 to Rs. 153.50. The hike in excise duty from 8 per cent to 16 per cent may have an impact on the profitability of the toothpaste major. In a segment where competition is al ready intense, the hike in excise duty may be difficult to pass on to customers.

The excise hike impact appears to have affected the fortunes of Essel Packaging, the key supplier of lamitubes to Colgate Palmolive. The stock price of the company has declined by Rs. 146.20 to Rs. 569.80.