It could be an early Diwali for consumer goods companies. The finance minister’s tax bonanza for India Inc. could bode well for fast-moving consumer goods (FMCG) firms struggling to deal with the slump in rural and urban demand. With the reduction in tax rates, companies could now increase consumer and trade promotions, and ramp-up marketing spends to stimulate demand during the ongoing festive season, said market analysts.
“We could see reactions coming in from companies in less than a month," said Sagarika Mukherjee, vice-president, Elara Capital, adding that in the current low-growth situation faced by consumer companies, promotion towards trade could intensify. “A large part of this tax cut will come to their bottom line, but there could be a chance they could give volume incentives to trade channels," she said explaining that the trade channel (for consumer goods makers), which has been facing a severe liquidity crunch, could see some heightened promotions led by companies. “It could help in lubricating the trade channel," she added.
From Nestle to Hindustan Unilever, India’s largest FMCG makers are set to benefit from this rate cut. For FY19, effective tax rates for FMCG companies, such as Nestle, Britannia, ITC and Colgate, were 33.3%, 34.6%, 33%, 32.1%, respectively. The revised tax rates could see companies passing on the benefits by 0.5% to 3% to consumers or trade, Mukherjee said.
“We welcome all measures taken to spur investment and growth," said a Hindustan Unilever Ltd spokesperson.
A Nestle India spokesperson said: “We will look into the copy of the final notification to understand the changes and the implications."
The lower taxes could help FMCG and retail companies take steps to revive demand, said other analysts. “In our view, consumer companies are likely to partially cut prices. Thus, optically demand can spur vs current estimates. When GST rate cut happened in consumer goods, there was a demand spurt. While the environment is different now, this notional saving or propensity to spur demand for consumer goods is likely," said Abneesh Roy, research analyst and executive vice-president, institutional equities, Edelweiss Securities Ltd. He added that partial cuts in pricing and gradual increase in ad spends could be in the offing, and this will benefit retail, FMCG and media companies.
“It is a question of how companies want to deploy the capital, some will redeploy the money in the form of promotions, trade discounts and higher ad spends, especially those seeing the impact of the slowdown," said Naveen Trivedi, assistant vice-president, institutional equities, HDFC Securities.
The FMCG sector had been struggling with consumers demand slowdown in daily staples and discretionary items. They had been hoping for a stimulus from the government that would help infuse liquidity, besides measures to reduce the tax burden on consumers as well as companies.
“The increased tax savings will boost cash flows, spur domestic and foreign investment, provide competitive tax rates and act as an economic driver towards ‘Make in India’," said Anand Kripalu, managing director and CEO at Diageo India.