BackCheaper soaps may not translate to higher demand
Lower duties alone cannot help the situation, though it can relieve cost pressures, says companies
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The country’s billion plus bathers may find their daily chore a little less taxing, thanks to finance minister P. Chidambaram. The interim budget has proposed a reduction in the customs duty on non-edible vegetable oil intermediates, which are the main ingredients used to make soaps.
At present, these intermediates attract duties of 10%, 12.5%, 15% or 20% levy, depending on the type imported, while the duty on soaps is only 10%. The government has lowered the duty to a uniform 7.5%. Domestic soap companies stand to reap significant benefits, with a caveat that the revisions can be reviewed when the final budget is presented. The two main listed companies that are likely to benefit are Hindustan Unilever Ltd (HUL) and Godrej Consumer Products Ltd.
Soaps contributed to 36% of Godrej Consumer’s stand-alone revenues in 2012-13, while oils and fats contribute to 36% of raw material costs. In HUL’s case, soaps contributed to 21% of sales while oils and fats contributed to 19% of input costs.
What impact will the duty reductions have? Notionally, a reduction in the basic duty from say, 15% to 7.5%, can result in a saving of 1.6% of sales, which they can use either to spend on discounts and promotions to revive demand or add back to their margins.
The soap category saw both sales and volumes decline in the December quarter, according to Godrej Consumer. Higher palm oil prices also forced it to hike prices. But the companies do not think that lower duties alone can help the situation, though it can relieve cost pressures. Godrej Consumer’s managing director Vivek Gambhir believes that stimulating demand will depend more on economic growth and consumer sentiment moving up from their present low levels.
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