Retaining the 6 per cent reduction in excise duty would help consumer goods companies improve realizations without affecting MRPs. The increase in excise duty on cigarettes would strike at cigarette companies. An increase in the minimum support price (MSP) would result in higher raw material costs for foods companies but would also raise rural consumption. We expect Colgate to be a major beneficiary.

Expectations

We expect the 6 per cent excise-duty reduction (4 per cent in the Dec ’08 Stimulus Package I and 2 per cent in the Feb ’09 Vote on Account) to be retained for the year. Considering the drop in prices of major raw materials, abatement rates to calculate excise may increase. It is also expected that excise on cigarettes would be increased by 8 per cent or more. We expect the government to take steps towards raising the minimum support prices.

Impact on the sector

As excise duty would continue at lower rates in the year, consumer goods companies would benefit. Reducing excise duty allows for improvement in realizations without changing the MRP. It also helps gain market share at the expense of unregulated manufacturers. A drastic rise in abatement rates would help consumer companies. The higher excise-duty rate on cigarettes (of 8 per cent or more) would have a negative impact on the cigarette segment.

The increase in minimum support prices of foodgrain would lead to higher raw material prices for foods companies. Nevertheless, it would also raise incomes of rural consumers.

Any steps towards expanding incomes of consumers (like rural employment, etc) would have a positive impact on the consumer goods sector. Investment in infrastructure would help improve the distribution network.

Companies affected

With lower excise duty rates for the rest of the financial year, we expect Hindustan Unilever, Nestle and Colgate to benefit (since they have been paying high excise duty). With higher minimum support prices, food companies like Nestle, Britannia and GSK Consumer Healthcare would be hit as their margins would be squeezed. An increase in levels of rural incomes would impact players with smaller SKUs or products suitable for rural consumers. We expect Britannia, Colgate and Marico to benefit the most from the rise in income levels of mofussil consumers.

(The report has been prepared by Shirish Pardeshi and Aniruddha Joshi of Anand Rathi Securities).