Fast moving consumer good companies are expected to witness 5-12% increase in earnings on the back of corporate tax reduction announced by finance minister Nirmala Sitharaman on Friday. According to analysts, the move will enable passing on these benefits and propelling the volume growth for FMCG companies.
Nestle, Varun Beverage, Colgate and GSK Consumer would be the biggest beneficiaries as they are in the highest tax bracket of 33%. Further, Hindustan Unilever would see 4 percentage point reduction in tax rate from current 29%. The tax benefits for Marico are expected to be marginal. Cigarette companies, at the highest tax bracket of 33%, would also see increase in earnings by 12%.
“We believe FMCG companies would be passing on the benefit in terms of price reduction, which would result in increase in demand specifically in rural India,” analysts at ICICI Securities noted.
According to Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India, with the new effective rate of 25.17% tax saving for a sample of 3,446 listed companies could be at least Rs 44,000 crore, which is a substantial boon for the corporates waiting for business revival in stressed environment. We expect the corporates should pass on such tax benefits by product price cuts that might be in the range of 2-5% across sectors so that demand is invigorated,” said Ghosh.
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Pranay Bhatia, partner & leader (tax & regulatory services), BDO India said, this will promote Make in India. Also, the announcement of reduced corporate tax rate of 15% for new manufacturing companies would also encourage companies to set up their manufacturing in India. “It is now for the states to provide solid infrastructure to make India the global manufacturing hub,” he said.
According to Axis Mutual Fund, EPS upgrades for full tax paying consumer companies are likely to be 11-14%. The average tax rate for consumer companies for the financial year 2018-2019 stood at around 29.40%. Kamal Nandi, executive vice president, Godrej Appliances said, “This is a positive move for the Indian economy and will help provide level playing fields to local manufacturers.
“It is expected to boost the economy and especially manufacturing sector is likely to get the impetus.”