Budget 2018: Consumption hopes rest on rural folks getting cash in hand
—Increase in cess on income tax from 3% to 4%.
—Rural demand has been a laggard. The budget has proposed a number of steps to boost farm and non-farm income. This is in the form of higher prices for farm produce, infrastructure works and schemes that provide non-farm jobs.
—Basic customs duty on fruit juices, crude and refined edible oils, and some toiletries increased.
—Customs duty on completely built units (CBU) hiked from 10% to 15% and on completely knocked down units (CKD) from 20% to 25%.
—Duty on imported truck and bus radial tyres hiked from 10% to 15%.
—Duties on specific parts/accessories of motor vehicles, cars and motorcycles hiked from 7.5-10% to 15%.
—The increase in cess is a negative for companies as it will eat into earnings growth, with consumer goods companies generally found to be in the relatively higher effective tax bracket.
—The budget raises hopes that rural incomes and employment prospects will improve, eventually leading to higher rural demand. This has been a key worry across companies and a revival in rural demand can give a significant boost to sales growth. The key factor to watch is how much of this promise translates into more money actually going into the hands of rural folks.
—Higher duties on crude and edible oils are good for domestic producers and farmers, but there is a risk of high prices leading to higher food inflation.
—Auto companies will gain from protectionist measures such as hike in duties on imported vehicles (CBU and CKD). Also, higher rural connectivity and better roads will improve demand for commercial vehicles. Rural push will see a gradual rise in demand for two-wheelers, farm equipment and tractors.
—Tyre companies that have been reeling under the onslaught of cheaper Chinese tyres will gain.
—Duty hike on auto parts and tyres will do little harm to original equipment makers as they import under specific trade agreements. It will, on the other hand, ease competition in the replacement market and, thereby, help the domestic auto components industry.
Stocks in focus:
—ITC Ltd’s shares rose 6% during the day but settled to an eventual gain of 1.5%. Fears that the government may announce some punitive taxes were anyway unfounded as tobacco taxation is now under the goods and services tax regime. The budget’s focus on the rural sector is positive for ITC’s packaged consumer goods business. The risk of adverse regulatory developments on its cigarettes business remains a key risk to watch.
—If the government’s measures work and boost rural incomes in fiscal year 2019 and beyond, that should lead to higher demand for products. This should lift sales growth for most firms selling mass consumption products such as Hindustan Unilever Ltd, Godrej Consumer Products Ltd, Marico Ltd, Dabur India Ltd and Colgate-Palmolive (India) Ltd.
—The BSE FMCG index closed higher by 0.6% on a day when the broad market closed down by 0.2%. An increase in inflation is the main risk to watch for.
—The BSE Auto index closed higher by 0.7%. Tyre stocks were in the spotlight as higher duties on imported tyres will help domestic manufacturers compete on a level playing field. JK Tyre Industries Ltd was the biggest gainer, rising 7%, while MRF Ltd, Ceat Ltd and Apollo Tyres Ltd all followed suit.
—Mahindra and Mahindra Ltd gained by 4.4% in the auto pack, as investors perceive improved prospects for its main segments of automobiles and farm equipment.
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