All-encompassing Package! - Marico Ltd reaction on Union Budget

The Union Budget 2010-11 is an all-encompassing package with focus on inclusion of all sectors, especially the aam aadmi, aurats aur bacche across sectors. There is also a conscious effort to work upon the building blocks of the economy, especially Infrastructure – both tangible and intangible, Agriculture & Rural Development.

Although there is now greater clarity on GST and DTC, with a pragmatic later deadline, the revised time lines proposed for the Direct Tax Code and GST implementation must be met without any loss of momentum. Similarly, the substantial reduction planned in fiscal deficit has to be actually realised.

Impact on the Economy and the Consumer Goods and Services Sector

There is a welcome reduction in personal Income Tax that would help consumption. There are several beneficiary constituencies- that will help a broad-based increase in disposable incomes across the country. There is a fair regional balance in the budget proposals. These are good developments for the consumer goods and services sector.

Stimulus withdrawal as regards excise duty, although widely expected, would still hurt the industry and is inflationary in nature. E.g. increased excise on petroleum products. Hopefully, resumption of growth would take care of the cost-push.

Increase in MAT rate is an adverse development, not fully compensated by the reduction in Corporate Income Tax surcharge. The MAT rate is now more than 60% of the marginal rate! The Government will have to conclusively address the concern that the transition to DTC will cause a loss of the carried forward tax shield by way of MAT credit. Simplification of tax procedures is good but the increase in thresholds could have been higher. Dividends received by Indian Companies from overseas listed companies should have been exempted from taxation.

Enhanced and broader incentives for Research & development will help fuel innovation. Also, there are a few visible green and eco-friendly measures.

The focus of the Budget is to consolidate the gains harnessing the economic recovery in the recent past, and make the growth more inclusive. The Finance Minister has done a commendable job by balancing the need to have a calibrated exit from the expansionary fiscal stance and the need to put more money in the hands of the consumers. Overall the Budget has unfolded as mildly positive for the consumer goods and services sector.

Impact on Marico

The impact of the proposals on Marico is mildly positive. We are still awaiting the fine print of the Budget document. However, based on the speech of the Finance Minister the impact of the key announcements is likely to be mildly positive for Marico as detailed below.

1. MAT rates have been increased from 15% to 18% and the surcharge on corporate tax has been reduced to 7.5%. Marico qualifies under MAT; however, the overall impact of these changes is currently neutral. This is due to the fact that the tax paid under MAT is available for adjustment against the future corporate tax liability once the company moves out of the ambit of MAT, assuming of course that the transition to DTC will NOT cause a loss of the carried forward tax shield by way of MAT credit.
2. Increase in rates of excise across the board and more specifically on petrol and diesel will create a cost push. Same will be the result of more services being brought under the Service Tax net. Details of this cost push are yet to be available- quick estimates suggest that these may not be unmanageable.
3. Rate of Service Tax has been retained at 10%, contrary to the general expectations of an increase. This carries no negative impact on our services arm, Kaya.
4. Favourable measures announced for the aam aadmi, aurats and bachche (“commoners”) will hopefully trigger an increase in disposable income all around, helped by the concessions on the personal income tax front. The overall impact on consumer demand is therefore likely to be mildly positive.

Marico is a leading Indian Group in Consumer Products & Services in the Global Beauty and Wellness space. Marico’s Products and Services in Hair care, Skin Care and Healthy Foods generated a Turnover of about Rs. 23.9 billion (about USD 478 Million) during 2008-09.

Marico markets well-known brands such as Parachute, Saffola, Sweekar, Hair & Care, Nihar, Shanti, Mediker, Revive, Manjal, Kaya, Aromatic, Fiancée, Hair Code, Caivil, Code 10 and Black Chic. Marico’s brands and their extensions occupy leadership positions with significant market shares in most categories - Coconut Oil, Hair Oils, Post wash hair care, Anti-lice Treatment, Premium Refined Edible Oils, niche Fabric Care etc. Marico is present in the Skin Care Solutions segment through Kaya Skin Clinics (101 in India, Middle East and Bangladesh), and through its soap franchise (in India and Bangladesh).

Marico’s focus on sustainable profitable growth is manifested through its consistent financial performance – a CAGR of 24% in Turnover and 28% in Profits over the past 5 years - while setting a record of several consecutive quarters of year on year growth- 41 for Profits and 37 for Sales.

The Marico scrip is listed on the Bombay Stock Exchange (BSE) (Code 531642) & on the National Stock Exchange (NSE) (Code “MARICO”).

Source : Equity Bulls

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