Consumer goods: A gradual recovery
The consumer packaged goods sector was seen as a key beneficiary of the goods and services tax (GST). Under GST, consumer goods firms would reorganize and align their operations to business needs and not tax needs, reaping cost savings and better efficiency.
How has the experience been so far? The long-term premise still holds. The short-to-medium term appear uncertain in some aspects.
Multiple tax rates for goods is one disappointment.Detergent powder is taxed higher than detergent bars. Shampoos got taxed higher but not hair oil. Rates have been changed subsequently too, forcing companies to recalibrate. The subsequent hike in the rate of cess on cigarettes was unexpected and has dealt a blow to cigarette companies.
Another concern is the refund mechanism for companies with factories in area-based exemption zones. The government has said these will continue but companies will get 58% of the refund due from the centre and will have to claim the rest from the states. But the rules for this process are yet to be notified, blocking their working capital till then.
Large distributors quickly aligned to GST but wholesalers—who deal in cash and mainly service rural and semi-urban markets—were in a bind. GST and the government’s efforts to lower cash transactions affected their business and, as a result, sales of consumer goods companies.
June quarter sales were affected, as distributors reduced purchases to keep low stocks during the transition. The wholesale channel problem added to it and continued in July as well. Sales of consumer goods firms did get affected in the June quarter.
Hindustan Unilever Ltd, in a recent investor presentation, said the trade situation is improving, perhaps signalling that distributors are stocking up. It also said the wholesale channel is stabilizing. Both are good near-term signals for the industry.
September quarter results and management commentary should give more clarity on the evolving situation. A slowing economy and its effect on consumption and whether rural growth will recover post-monsoon are key concerns.