Kotak Sec, FMCG : Budget Expectations

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FMCG
Current view
q Government's emphasis on rural sector employment and income generation
shall be the key point to focus on for FMCG companies in this budget. The outlay
for rural schemes is likely to be higher in the budget, given likelihood of indexing
the minimum wages with CPI for agricultural labour under NREGA. Rural
income enhancement, and its sufficiency in the face of high inflation, shall determine
impact on FMCG stocks. HUL, Dabur, and GCPL's exposure to rural demand
is higher than other listed peers, and shall be impacted in a greater way.
q The government has been, as per media reports, making some headway towards
implementation of GST, and a constitution amendment bill is likely to be
passed in the budget session for pursuing the same, post-budget. Display of
government's strong intent shall be beneficial to FMCG companies.
q Given a preference for phased transition to DTC, the budget is likely to raise
MAT this year. We believe a rise in MAT could also be accompanied with abolishing
the surcharge, which, net-net, shall have a minor negative impact on
FMCG companies paying MAT.
q We expect excise rates on cigarettes to move up in low single digits, given sharp
rise in last year's budget. Given that ITC stock has performed poorly despite
strong 3QFY11 performance, we believe the market may be factoring in a possibility
of another sharp rise in excise duties for cigarettes.