Service tax
Direct tax
Excise duty
Defenseexpenditure
Fiscal deficits
Subsidies
Government borrowings
Budget deficits
Indirec
t tax
Corporation tax
Income tax
Import duties
R
R
Expenditure
Good
s and
servi
ce ta
x
PRE BUDGET ANALYSIS REPORT FMCG
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PRE-BUDGET ANALYSIS February 15 2013
FMCG
Current view Recent reports indicate that some progress has been made on GST negotiations,
and rollout in FY15 is not unlikely. As such, a roadmap/ timeline shall bewatched for. GST shall provide long-term benefits to FMCG sector, on accountof: 1/ greater parity with unorganized sector (hitherto non-tax paying) shall en-able FMCG organized sector greater, long-term growth, 2/ supply chain benefitsthat accrue on account of GST.
The inclusion agenda of the Congress government in both terms has been a cru-cial driver of FMCG sector growth. We believe that purely by way of subsidies/allocation to flagship schemes of the government, this budget is unlikely to sur-prise positively (given fiscal constraints). However, the government has beenmaking progress on two other counts that enable greater real transfer payments,viz. Food Security Bill, and the Direct Cash Transfer scheme. The budget willlikely contain timelines about large scale rollout of these, especially the cashtransfer scheme. Net-net, on the inclusive agenda of the government, we expectthe budget to be modestly positive.
Excise duties on cigarettes, given 21% hikes across categories last year, arelikely to be lower in the year. Post hikes in last year's budget, we believe indus-try volumes have held firm, and the government has an opportunity to raise col-lections by way of higher duties. We believe that the budget is likely to raiseexcise duties on cigarettes in high single digits. Last year's budget had introduced(and then annulled, via financial amendment bill), ad-valorem duties on ciga-rettes. We believe that ad-valorem duties, if introduced, shall be a negative forcigarette manufacturers. Excise on some packaged items may also be raised.
EXPECTED BUDGET IMPACT:Neutral
LONG TERM OUTLOOK:Neutral
Continued focus onrural growthenhances incomes atbottom of pyramid;direct cash transfersto be more wide-spread; outline forfood subsidy bill
Inclusive GrowthAgenda
Expect modestgrowth in expen-ditures on ruralsector; expectpostiive projectionson Direct CashTransfers
Fiscal deficit primeconcern; DCT, FoodSubsidy Bill should beseen as electorateempowering initiatives
Positive Impacton FMCGstocks fromDirect CashTransfers/ FoodSubsidyexpectations
Timelines for GSTimplementation; GSTto reduce supplychain constraints,improve competi-tiveness of FMCGcompanies againstunorganized players
Progress on GST Expect positivestance on imple-mentation fromFY2015
GST discussions betweencentre and states haveprogressed, as reportedby media
FMCG stocks tobenefit fromannouncement
No change, due todistortionary impactof differentialtaxation on tobaccoproducts
Excise Duties onCigarettes
Expect hike inhigh single digits
Significant hikes in thelast year's budget reducelikelihood of stronghikes, volumes staystagnant
c.10% hikeshall be neutralfor cigarettemanufacturers.No/ low-singledigit hikes shallbe a positive
Key budget expectations
Issues Industry wish-list Our expectation Rationale for our Impact of ourexpectation expectation
Source: Kotak Securities - Private Client Research, Industry
Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 22
PRE-BUDGET ANALYSIS February 15, 2013
FMCG (contd...)
Top picks
Company Price EPS (Rs) PE (x) Recommendation(Rs) FY13E FY14E FY13E FY14E as per our last
report
ITC LTD. 300 9.4 11.2 31.9 26.8 ACCUMULATE
MARICO LTD. 209 6.3 7.9 33.2 26.5 ACCUMULATE
Source: Kotak Securities - Private Client Research
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PRE-BUDGET ANALYSIS February 15, 2013
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Fundamental Research TeamDipen [email protected]+91 22 6621 6301
Sanjeev ZarbadeCapital Goods, [email protected]+91 22 6621 6305
Teena VirmaniConstruction, [email protected]+91 22 6621 6302
Saurabh AgrawalMetals, [email protected]+91 22 6621 6309
Saday SinhaBanking, NBFC, [email protected]+91 22 6621 6312
Arun [email protected]+91 22 6621 6143
Ruchir KhareCapital Goods, [email protected]+91 22 6621 6448
Ritwik RaiFMCG, [email protected]+91 22 6621 6310
Sumit PokharnaOil and [email protected]+91 22 6621 6313
Amit AgarwalLogistics, [email protected]+91 22 6621 6222
Jayesh [email protected]+91 22 6652 9172
K. [email protected]+91 22 6621 6311
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