Which sectors will pass on the goodies?
Passing on cuts may insulate durable makers from the slowdown. S. Hamsini Amritha Aarati Krishnan The 4 per cent cut in excise duty was the most significant chapter of the recent stimulus package. But which players will pass on the benefits to consumers? Which industries are the key beneficiaries of this cut? Here's a quick take on four key sectors: Automobiles With cuts in excise duty following the sharp declines in interest rates, the stimulus package has given automakers room to reduce selling prices to perk up flagging sales. The decline in volumes, which first started with the medium and heavy commercial vehicles segment in 2007-08, has since spread to other segments as well. Though passenger vehicles sales remained relatively less affected last year, the first eight months of this year saw moderating growth in this segment too. In April-November 2008, passenger vehicle sales volumes grew by just 1 per cent over the same period last year. The reduction in Cenvat rates has reduced the excise duty burden from 12 per cent to 8 per cent for small cars, two- and three-wheelers and buses, and from 24 per cent to 20 per cent for large cars. Excise duty has been cut from 14 per cent to 10 per cent for commercial vehicles. Given the slowdown, automobile majors have lost no time in passing on the benefit of excise duty cuts, through price reductions of 3-4 per cent, to consumers. Tata Motors, Maruti Suzuki and Hyundai have announced price cuts across all models. Tata Motors effected a price cut of between Rs 12,000 and Rs 60,000 across its portfolio of cars and commercial vehicles, while the country's biggest car maker, Maruti Suzuki, has slashed prices (Maruti 800, A Star and Swift- petrol) in the range of Rs 6,500-Rs 23,000. Other players such as Ford, General Motors and Skoda India have also announced price cuts. While the price cuts may at best prompt consumers to advance their buying decision, it is availability of finance that holds the key to a revival in demand for the sector at this juncture. On this score, it needs to be seen if recent reductions in interest rates do filter down to automobile loans. FMCGs Makers of fast moving consumer goods (FMCGs) may retain some benefits from the excise duty cuts announced in the stimulus package. With offtake of FMCGs growing at a fast clip, there are no signs yet that the domestic slowdown is impacting demand. This has endowed players with considerable pricing power and most large FMCG-makers' products, be it soaps, detergents or personal products, have seen a 5-7 per cent hike in selling prices over the past six months. Even a substantial correction in prices of inputs hasn't yet triggered FMCG price cuts, with most players ploughing back these surpluses into promotional offers. The above trends suggest that FMCG companies may be under no pressure to immediately pass on excise duty cuts to consumers. But the benefit from the 4 per cent reduction in Cenvat rates is not likely to be uniform across FMCG categories or players. Large FMCG-makers may be the key ones to see excise savings, with the Cenvat rate set to fall from 14 per cent to 10 per cent. The changes in excise duty do not impact cigarettes (ITC, Godfrey Phillips), biscuits (Britannia Industries, ITC) or ready-to-eat foods, as these products are either subject to specific duty or are exempt from excise. Players with manufacturing facilities located mainly in tax-free zones will also not see material excise duty savings. Of the listed FMCG companies, Hindustan Unilever (excise outgo at 42 per cent of operating profits), GlaxoSmithkline Consumer Healthcare (42 per cent), Colgate Palmolive India (25 per cent) and Nestle India (21 per cent) have the highest excise duty outgo and may be key beneficiaries of the stimulus package. Players such as Marico, Dabur and Emami may reap marginal benefits, as their excise incidence is less than 10 per cent. Consumer Durables Durables such as TV, washing machines and refrigerators, which were earlier subject to excise duty at 14 per cent, will now be subject to levy at 10 per cent. Purchases of consumer durables have not been as severely affected by the economic slowdown, as automobiles. Industry majors have put up impressive sales growth in the festive months of September-October. Sales for LG's home appliances, for example, were up by 45-50 per cent during this period. Godrej Appliances posted a volume growth of 40 per cent and Samsung registered a 35 per cent rise in sales during this period. But with the festive months now behind them, these companies are beginning to feel the heat of slowdown. Reports suggest that sales of durables were down by about 10 per cent in November (15 per cent decline for products linked with customer finance). It is roughly estimated that manufacturers are likely to effect a 2-5 per cent cut in prices for customers, following the excise duty relief, as some manufacturers have located facilities in excise-free zones. Electronic devices such as i-pods, Mp3 players and direct-to-home boxes, which were earlier taxed at 8 per cent, will enjoy a reduced excise duty of 4 per cent. DTH operators have, however, been categorical in saying that they will not pass on the benefit to on to the customers. Their reasons are two-fold. First, many operators such as Tata Sky and Dish TV are already in a price-discounting mode, in a bid to add subscribers. Further, the industry claims it is already overburdened by taxes. Base Metals As part of the stimulus package, the government has completely removed the export tax on iron ore fines and reduced it to 5 per cent from 15 per cent on iron ore lumps. Base metals such as aluminium and copper (major raw materials for most industries) that were subject to 14 per cent excise duty will now be charged at 10 per cent. Although producers haven't yet announced price cuts in response to the excise duty reductions, slowing demand may leave them with little choice on prices. With international prices already on a softening trend, domestic prices of base metals have already been on a downtrend in recent months. Despite iron ore prices having corrected sharply by over 50 per cent, the removal of the 8 per cent export duty may make Indian iron ore a tad more competitive in the global market. Producers estimate $4 per tonne of incremental net realisations for the rest of the year. Cheaper freight rates and the export tax cut may enable exporters to sustain their order flows. Apart from improving realisations for iron ore exporters, the measure will provide some further relief to domestic steel-makers, the key consumers of iron ore. Responding to recent price trends, state-owned mining giant NMDC has slashed its long term-iron ore prices by 25 per cent from December 1. This will bring major relief to steel-makers such as Essar Steel, JSW Steel and Ispat, which procure their raw material from NMDC http://www.thehindubusinessline.com/iw/2008/12/14/stories/2008121450440700.htm Government cannot make man richer, but it can make him poorer --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups "Kences1" group. To post to this group, send email to [email protected] To unsubscribe from this group, send email to [email protected] For more options, visit this group at http://groups.google.com/group/kences1?hl=en -~----------~----~----~----~------~----~------~--~---
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