Current Economic Statistics and Review For the Week 
Ended February 5, 2005 (6^th Weekly Report of 2005)

  I

Highlights of  Current Economic Scene

Infrastructure

OPEC decided to maintain oil output limit at 27 million barrels per day.

China, meanwhile, lent Russia $ 6 billion to help renationalise the key unit of oil major Yukos. 

Cement output during April – December 2004 totalled 91.8 million tonnes which was 7.1 per cent higher than 85.7 million tonnes achieved during the previous corresponding period. 

The Union Cabinet approved National Electricity Policy on February 02, 2005 which notified, inter alia, guidelines to enhance the present level of per capita consumption of power from the present level of 587 kwh per year to at least 1000 kwh, a year by 2012, to provide subsidies to weaker sections and consumers below the poverty line, to attract private investments with a view to increasing total power generating capacity to ensure a spinning reserve of at least 5 per cent with an investment of Rs.9,00,000 crore by 2012, to provide power for all households by 2010 and tariff determination via competitive bidding for power procurement by distribution licensees.

Corporate Sector
New ventures
Piramal Holdings Ltd decided to invest over Rs 300 crore for setting up 16 departmental stores, named Priamyd Megastore, across the country in next three years. 

The state run oil major, Indian Oil Corporation decided to enhance its retail operations by setting up over 10,000 retail outlets by the end of the current financial year. 

Hindalco is reported to be evaluating domestic and overseas options to raise $ 1 billion for funding its expansion projects across the country. 

Holcim, the world’s second largest cement company, plans to invest $ 1 billion, approximately Rs 4,300 crore to expand its footprint in India over the next 5-7 years. The investment is in addition to the Swiss company’s investment of $ 800 million in acquiring a 67 per cent stake in Ambuja Cement India Ltd (ACIL), the closely held investment firm that owns 13.8 per cent in ACC, and to scale up its holdings in ACC to 50 per cent. 

India is all set to have its first video on demand service. The Subhash Chandra promoted direct-to-home (DTH) television broadcasting service provider Dish TV will start its video on demand service by April 2005. 

Hindustan Lever has forayed into the water purifier business with the launch of Pureit brand. 

Mumbai based Tricom India, a non-voice business process outsourcing company focusing on transaction processing activities, plans on investing Rs 20 crore for its expansion activities. 

NTPC informed BSE that the company approved an investment of an estimated Rs 229.24 crore to undertake renovation and modernisation Phase III of Talcher Thermal Power Station. The investment is proposed to be funded in a debt equity ratio of 50:50. 

Himatsingka Seide Ltd, Bangalore headquartered maker of high end fabric for upholstery, plans to expand by making bed linen which may be sold under a new brand. 

Daimler Chrysler decided to foray into the commercial vehicles segment in the country with the launch of a heavy duty truck and a luxury coach. 

National Thermal Power Corporation, India’s largest power producer, is bidding for consultancy and operation and maintenance projects in countries like Saudi Arabia, Bahrain, Lebanon and Oman. 

After the indigenous branded car, Tata Motors is planning to launch an indigenous branded bus. 

The costliest car in India, the Bentley Arnage RL was launched with a base price tag of Rs 2.5 crore. 

Mergers & Acquisitions
Wipro Technologies Ltd is considering an acquisition in the transactional process domain which at present is one of its biggest focus areas. 

Pantaloon Industries has struck a strategic deal with Planet sports and fashion retail company to acquire 49 per cent of the company. 

Russian conglomerate AFK Sistema signed an agreement to buy 49 per cent of the C Sivasankaran promoted Aircel Televentures for $ 450 million. Aircel provides cellular services in the Chennai and Tamil Nadu circles. 

The GAIL India Ltd is set to acquire a 10 per cent stake in China Gas Holdings. 

Global Infrastructure Holdings Ltd (GIHL), an overseas special purpose vehicle promoted by Pramod and Vinod Mittal of the Ispat Group, has acquired iron ore mining concessions for two mines in Nigeria. 

The Rs 850 crore Mudra Communications acquired the Delhi based Rs 20 crore Kidstuff Promos & Events (KPE) for an undisclosed sum. 

Max India’s board cleared the divestment of its 100 per cent stake in Comsat Max and C Max Infocom in favour of Bharti Infotel, a wholly-owned subsidiary of Bharti Tele-Ventures Ltd in an all cash deal valued at Rs 33 crore. 

Company Issues
Asset Reconstruction Company (India) Ltd (Arcil) lamented the bank’s reluctance to sell their non-performing assets (NPAs) at a ‘realistic’ price. It wants banks to recognize that value erosion in NPA portfolios is always greater than the provisions made. 

Private equity firm Warburg Pincus sold a 3.2 per cent stake in Bharti Tele-Ventures for $ 306 million i.e.,over Rs 1,300 crore. 

ITC created a total rainwater harvesting potential of 16.1 million kilolitres against its own net consumption of 8.4 million kilolitres, planted 19,500 hectares with 66 million saplings and recycled over 53 per cent of the solid waste it generated besides empowering millions of farmers through its e-choupal’s providing knowledge and a trading platform to farmers, as said in its first ‘sustainability report’ released to highlight its contribution across economic, ecological and social dimension, or the ‘triple bottom line’. 

After a spate of hurting price cuts in 2004, FMCG rivals Hindustan Lever and Procter & Gamble are planning to raise the prices of some key detergent brands.

Three independent directors on the Reliance Industries Ltd (RIL) board – DV Kapur, S Venkitaramanam and YP Trivedi – or their relatives have had a pecuniary relationship with the company and its associate companies like Reliance Capital and Reliance Infocomm. 

Multinational drug companies are considering launching blockbuster molecules in India largely through their unlisted 100 per cent subsidiaries and not through their publicly held Indian arms. 

Corporate borrowings through private placement of debt fell by 32 per cent to Rs 11,445.50 crore in the third quarter of 2004-05, compared with Rs 16,818.67 crore in the preceding quarter.

Policy Issues
The government is likely to restrict provident fund trusts from investing in their parent companies. The idea is to prevent an Enron-style scam, wherein not only did thousands of employees lose their jobs when the company declared bankruptcy, but they also lost about $ 1 billion as their retirement savings were invested in the company’s stock. 

The government expects to get around Rs 15,000 crore through the disinvestment of shares in oil and power companies, state-owned banks and Maruti Udyog and Bharat Heavy Electricals (Bhel) during the next fiscal year. 

With the plan to disinvest MMTC and State Trading Corporation on the back burner, the commerce department has asked both companies to rework their business models and venture into new areas like warehousing and retailing. 

The center has asked tobacco major ITC Ltd to cough up Rs 450 crore within 30 days or attract a 15 per cent penal interest. 

Company Results

Inflation
The annual WPI-based inflation fell to a 34-week low to 5.37 per cent for the week ended January 22, 2005 from 5.42 per cent recorded during the previous week, mainly due to a fall in prices of vegetables and fruits, edible oil, fuel and manufactured products. Inflation was higher at 6.24 per cent a year ago. Inflation fell since November following a series duty cuts on petroleum, polymers and steel products by the government while the RBI sucked off excess liquidity through repo rate last year. During the latest recorded week, wholesale price index (WPI) declined by 0.1 per cent to stand at 188.4 points with the indices of primary articles, fuels and manufactured products moving down. The primary articles group index dipped by 0.4 per cent to 184.7 points due to sharp fall in the prices of minerals and non-food articles and a marginal dip in food prices. The fuel, power, light and lubricants group index dipped marginally to 287.9 due to one per cent fall in naphtha prices. Manufactured products group index declined marginally by 0.1 per cent to 167.4 points due to fall in prices of food products and basic metals, though prices rose for textiles, paper, rubber, chemicals and transport parts. 

Banking
Banks have achieved 82 per cent of the disbursal target by giving out Rs.1,05,000 crore in loans to agriculture and allied sectors till December 31, 2004. Credit to agriculture and allied sectors by all agencies except private sector commercial banks amounted to Rs.82,581 crore as on December 31, 2004, forming about 71.55 per cent of the projected credit flow of Rs.1,13,825 crore for the current year. 

Allahabad Bank, Canara Bank, Indian Overseas Bank, State Bank of India and State Bank of Patiala have excelled other banks in extending credit to the small scale industries (SSI), according to a paper prepared by the finance ministry’s banking division. These banks, which had set higher SSI credit for each year, had consistently surpassed them. However, the overall rate of growth in credit disbursal to SSIs has been rather slow. While the total bank credit to SSI sector stood at Rs.46,045 crore in March 2000, it rose to Rs.58,278 crore in March 2004. The total amount of credit disbursed actually declined from Rs.58,988 crore in March 2003 to Rs.58,278 crore in March 2004. The main factor affecting credit growth in SSI sector is high level of non-performing assets (NPAs) ranging between 17.62 – 19.5 per cent. The other major factor has been the growing incidence of sickness in the sector. Such accounts were 1,68,000 amounting to Rs.5,706 crore as on March 2003. 

The State Bank Group has unveiled its plan to foray into IT services sector where the group will float a subsidiary and will partner with an IT firm for software development to provide business solutions for the financial sector in the country. The group will also venture into the domestic pension market for which it will hire a consultant to discuss the possible foreign partner for its foray into the sector. 

Dena Bank has posted a decline of 68 per cent in its net profit in the third quarter ended December 31, 2004. The bank’s net profit in the reporting quarter stood at Rs.22.9 crore, as against Rs.72 crore posted in the corresponding period of the previous fiscal. The decline was largely on account of a fall in the bank’s treasury and other income, which fell by 62 per cent.

The Reserve Bank of India (RBI) has issued depositor-friendly guidelines to facilitate consolidation and emergence of strong entities in the urban co-operative banking (UCB) sector. As per the guidelines, the RBI will consider proposals for merger and amalgamation in the UCB sector in the following circumstances: (1) when the net worth of the acquired bank is positive and the acquirer bank assures to protect entire deposits of all the depositors of the acquired bank; (2) when the net worth of the acquired bank is negative, but the acquirer bank, on its own assures to protect the deposits of all the depositors of the acquired bank; (3) and when the net worth of the acquired bank assures to protect the deposits of all the depositors with financial support from the state government extended upfront as part of the process of merger.

Insurance
SBI Life Insurance Company Ltd. has announced 4 per cent annulized interim bonus on its pension policy for the financial year 2004-05. The bonus will be payable on all policies that are in force as on September 30, 2004.

Telecom
The government has allowed 74 per cent foreign direct investment (FDI) in telecom companies, raising the ceiling from 49 per cent at present. However, the higher cap comes with a slew of riders to address security concerns raised by the Lefties and the intelligence agencies. The 74 per cent cap will include the shares held by foreign institutional investors, non-resident Indians, depository receipts (ADRs and GDRs), foreign currency convertible bonds and convertible preference shares. In addition, the foreign investment in holding companies will also be taken into account while calculating the foreign investment in holding limit. Companies will be required to disclose the holding pattern half-yearly and also certify that its foreign investment is within the 74 per cent cap. Most of the European nations had allowed more than 74 per cent FDI in telecom. Countries with over 74 per cent FDI in telecom are Austria, Belgium, Czech Republic, Denmark, Finland, Germany, Ireland, Italy, The Netherlands, Norway, Sweden, Switzerland, UK, Argentina, Peru, Hong Kong, Chile, Australia, Japan and Singapore. Countries with less than 74 per cent FDI in telecom are China, Korea, Malaysia, New Zealand, Philippines, Taiwan, Thailand, Vietnam, Turkey, Ukraine, Brazil and Mexico.

Public Finance
Finance ministry lost out Rs 1,347 crore in revenues from crude oil imports during first half of 2004-05 as about 30 per cent of the crude imported was duty free. Customs duty amounting to Rs 1,347 crore was forgone because of duty free imports of 11.58 million tonne under the exemption schemes. The total revenue from crude imports would have been Rs 5,826 crore. In order to protect consumers from sharp hike in international crude oil prices, petroleum ministry had been making case for cutting import duty on crude oil.

In its pre budget memorandum, the left parties have forwarded a host of proposals. The left parties have asked the government to tax forex outflows, which would not only generate revenue but would also keep a check on the “hot” money flows in the economy. They have also suggested specific targets for the realisation of tax arrears. The Left parties have further urged to widen the tax base to increase the tax-to- GDP ratio by 1.5 per cent (from 9.12 per cent in 2003-04), by focussing on the “upper classes”. The central plan outlay for the Common Minimum Programme was also brought into focus with an aim to increase it by Rs 50,000 crore, including an additional Rs 20,000 crore allocation for the national rural employment guarantee scheme. The Left parties have also asked for correction of the inverted customs duty structure in various sectors that hit the domestic industry, restructuring of the excise and customs duties on petroleum products on the lines of the parliamentary standing committee. The setting up of Investment Commission from PSU sell off has also been met with criticism, by the Left parties. The Left parties have also suggested expanding the tax base taking 1991 as base year to raise Rs 30,000 crore more.

The rise in the input costs may prove to be a set back for railway minister as his ministry’s expenditure is expected to overshoot its target of Rs 41,417 crore by Rs 100 crore during 2004-05, compared with savings of Rs 1,500 crore in its working expenses in the last fiscal year. Increase in diesel prices and salary outgo due to 50 per cent merger of the dearness allowances was responsible for higher spending.

According to the industry body Assocham, implementation of VAT will bring down retail prices and may add Rs 75,000 crore per annum to the government. The chamber suggested phasing out central sales tax (CST) and extension of state VAT to additional excise duty products like sugar, textiles and tobacco, which are not covered by VAT. It further suggested that local or state level taxes like octroi, entry tax, lease tax, works contract tax, entertainment tax and luxury tax should be integrated into the new tax regime. President of the association Mr Sanghi added that before an integrated national VAT system is adopted, both central and state governments will have to reform their respective indirect tax structures and implement sub-national VAT to create a platform for national VAT at a later stage.

All states have agreed to set up individual cells to monitor value added tax (VAT) credits and keep a check on revenue and prices. The cells would ensure that there was no undue increase in prices under VAT since tax was revenue neutral. The government is likely to set aside around Rs 1,200-1,500 crore in the budget to compensate for states for possible losses because of the implementation of VAT from April1, 2005. The white paper on VAT had stated that the government would compensate for 100 per cent losses in the first year, 75 per cent in the second year and 50 per cent in the third year.

The Commerce ministry’s gross budgetary support (GBS) for 2005-06 is likely to be hiked by 25 per cent to Rs 1,350 crore from Rs 1,078 crore in 2004-05. According to official sources, the increase in GBS is primarily to help industry step up its allocation for various promotional schemes. An additional sum of Rs 2,000 crore under the national export insurance scheme, which was announced in November last year, conditional on the cabinet’s clearance before the month end, has also been promised. The outlay for state infrastructure has been increased by Rs 100 crore, whereas assistance for leather development has been hiked for Rs 80 crore. The commerce ministry is seeking for the removal of cesses including the Agricultural Produce Cess, the Agricultural and Processed Food Products and the Export Development Authority (APEDA) cess, the textile cess and the export cess. The ministry has also suggested that the multiple incidence of education cess on sales made to the domestic tariff areas by the export oriented units (EOU’s) should be reduced. The ministry has further recommended exemption from Central Sales Tax (CST) on capital goods and raw materials on EOUs at par with the Special Economic Zones (SEZs).

The power sector companies may get some major tax breaks in the coming budget. The government is considering a tax restructuring proposal to either exempt the entire power sector from taxes till 2012 or rationalise existing tax levels by offering a complete waiver of excise duties. It is also planning to cut customs duty to 5 per cent. The fiscal incentive package is being initiated to attract investments worth Rs 9,00,000 crore to provide power for all by 2012.

The government is considering a proposal to lower the 12.5 per cent dividend distribution tax paid by domestic companies. At present, together with a 2.5 per cent surcharge and 2 per cent education cess, (inclusive of the surcharge) the dividend distribution tax liability for Indian corporates would be 13.07 per cent. A marginal cut of 2 per cent or so is being considered.

The Finance ministry is likely to consider the textile industry’s demand for a cut in customs and excise duties on purified terapthalic acid (PTA), monoethelyne glycol (MEG), polyester filament yarn (PFY) and its finished products and titanium dioxide. The demand is a result of the industry’s bid to tap the huge potential owing to the quota free regime. The industry has demanded a reduction of customs duty on PTA, raw material for polyester, from 20 per cent to 5 per cent on MEG, another raw material for polyester from 20 per cent to 5 per cent: reduction of customs duty on TiO2 additive for polyester, from 20 per cent tot 5 per cent and reduction of excise duty of PFY (partially oriented and textured), finished products from 24 per cent to 16 per cent.

The Federation of All India Textile Manufacturers Association (Fatima) has submitted a pre budget memorandum to the Union Textile minister to make sure that man-made and cotton textiles were treated on the same level. They have asked for lowering of excise duty on blended and polyester fabric. The association has asked for lowering of excise duty on blended yarn and polyester, which attracts duties of 12 per cent and 24 per cent respectively. The trade body has also asked the government to lower the service tax to 5 per cent on textile industry.

The finance ministry is likely to reconsider its earlier decision of taxing NRE (non-resident external) deposits. It might tax interest income earned by only on fresh deposits or renewals from April1 2005 and not on the entire stock of existing deposits. The Finance Act of 2004 had proposed to withdraw tax exemptions extended to NRE deposits from April 1 2005. The Finance ministry is also likely to rectify the TDS (Tax deducted at Source) anomaly between Indian and foreign banks. While foreign banks will be required to deduct TDS at 33.66 per cent, an Indian bank will have to pay a TDS of 22.44 per cent. A uniform 10 per cent rate was being considered for TDS on interest paid on RE deposits to reduce administrative hassles.

The government may cut customs duty on completely knocked down kits (CKDs) and completely built units (CBUs) of the passenger vehicles in the budget. This, according to the government officials will rationalise the customs duty rates on passenger vehicles to Asean levels.

The Civil Aviation ministry has sought measures in the budget to reduce the cost of operation of airlines, including rationalisation of the tax structure on aviation turbine fuel and dismantling the monopoly of public sector oil companies on the supply of fuel. The civil aviation ministry has also sought a year’s extension in imposing withholding tax on aircraft lease charges.
The Solvent Extractors’ Association of India has appealed to the government to consider the removal of excise duty of Rs 1000 per tonne on refined vegetable oil in the forthcoming budget. The excise duty is leading to a distortion between excise complying units and others. Old units are working at a disadvantage against new units enjoying excise exemption.

Capital Market
Primary Market:
Secondary Market
The markets were bullish during the week ended February 4, with the BSE sensex gaining 199.14 points to close at 6618.23 and the NSE nifty rose by 69.65 per cent by settling at 2077.95. The buoyancy has been attributed to the slew of measures announced by the government relating to the foreign direct investment (FDI) in telecom sector and clearance of National Electricity Policy, wherein the limit has been hiked from 49 per cent to 74 per cent. Further, the global ratings agency, Standards & Poor’s (S&P’s) raised its long-term foreign currency rating on India by one notch to “BB+”, with a stable outlook. Also, FII’s flows have been more than a billion in the past six trading sessions. 

During the week all the sectoral indices of BSE have registered gains with the BSE Metal, BSE PSU gaining the highest 352.20 points and 216.20 points, respectively. The BSE sensex gained 199.14 points over the week, while BSE 500 gained 107.40 points. 

Sebi has said that the proposed new corporatised stock exchanges cannot issue any shares or pay dividends to its members out of reserves or assets on the effective date, when the bourses will be corporatised. 

Ministry of Finance is considering increasing the participation of the commercial banks in the equity markets by raising the limit from 5 per cent to 10 per cent of incremental deposits. 

Derivatives
Given the buoyancy in the cash market, there was substantial trading interest in derivatives as the open interest rose across the board. During the trading in F&O’s segment of the NSE ranged between Rs 11,056.9 crore and Rs 14,696.10 crore. 

Bond Market
Given the buoyancy in the stock markets combined with expectations of a hike in benchmark rates in the US, the option of foreign currency convertible bonds (FCCBs) has become attractive. The FCCBs raised and proposed in the first six months of the 2005 calendar year is expected to overshoot the last years total FCCB issuances of US $ 1.6 billion, which is the highest ever amount raised through it. 

Government Securities Market
The government has increased the Employees Provident Fund (EPF) rate by 100 basis points to 9.5 per cent with retrospective effect from 2002-03. 

Primary Market
The RBI has announced the sale (re-issue) of 8.35 per cent 2022 for a notified amount of Rs 5,000 crore on February 7. 

Secondary Market
Apart from equities, the government has allowed all non-government provident funds, superannuation funds and gratuity funds to invest in Collateralized Borrowing and Lending Obligation (CBLO). They are further allowed to invest up to 10 per cent in the debt instruments bearing investment grade rating and / or equity-linked scheme of mutual funds regulated by Sebi. 

The weighted average YTM on 7.38 per cent 2015 fell from 6.74 per cent on January 28 to 6.72 on February 4. The market, however, remained bearish due to the hike in the interest rates on the EPF from 8.5 per cent to 9.5 per cent and also the hike in US Fed rate by 25 basis points. 

Clearing Corporation of India Ltd. (CCIL) has introduced two indices- liquid and broad indices- to help market players benchmark the performance of their bond portfolios as well as track the market movements. 

The liquid index comprises five most liquid bonds (accounting for more than 70 per cent of the trading volume), while the broad index consists of 20 most liquid securities (accounting for more than 85 per cent of the total trading volume). Both the indices have been constructed with observed prices of securities. Trades of Rs five crore and above have been taken into account to arrive at weighted average price of securities that constitute the indices. In case a bond is not traded for a day, the theoretical price using CCIL Zero Coupon Yield Curve is used. 

Bond Market
The RBI is favouring the financial institutions to raise funds from local markets rather than raising funds through the external commercial borrowings. RBI has, therefore, turned down the proposal of two public undertakings – Rural Electrification Corporation and Indian Railways Finance Corporation. 

Foreign Exchange Market
The rupee rose by 26 paise against the US dollar from – to Rs 43.46 due to the ratings upgrade by the S&P’s of India’s foreign currency outlook to ‘BB+’, just one notch above the investible grade. 

The six-month forward premia fell from 2.26 per cent on January 28 to 2.13 per cent on February 4. 

Commodity Market
The government and the RBI are finalizing a proposal to allow large institutional players like banks to trade in commodity futures and to make warehouse receipts eligible securities. For this, the Banking Regulation Act and Negotiable Instruments Act needs to be amended to make warehouse receipts a negotiable instrument. 

The National Commodity and Derivative Exchange (NCDEX) managing director and chief executive officer P. H. Ravikumar has stated that NCDEX plans to set up separate indices for metals, bullion, energy and agriculture. The agriculture index will have sub-indices for cereals, oilseeds, and plantation crops, among others. However, he confirmed that none of them would be launched until it is almost certain that the Forward Contracts Regulation Act is amended.The Multi Commodity Exchange (MCX) is to launch crude oil futures from February 9 and thus becoming the country’s first commodity exchange to launch crude oil futures.

Credit Rating:
International rating agency Standard & Poor’s has raised India’s long-term foreign currency rating by a notch to BB+ with stable outlook, based on the country’s improved external position and growth prospects.

Moody’s rating for India’s long-term foreign currency is Baaa3, while Fitch has given a rating of BB+ with a stable outlook.

Crisil has assigned a P1+ rating to the Rs. 25 crore CP programme of Micro Inks, the rating reflects the company’s leadership position in the domestic printing inks industry and its diversified presence in the international market.

In an another exercise, Crisil has assigned AAA/stable rating to Canara Bank’s Rs. 500 crore Tier-II (subordinate debt) issue. It has also reaffirmed the AAA/stable rating it had assigned to the bank’s earlier bond issue of Rs. 450 crore.

Icra has reaffirmed the LAA + rating assigned to the Rs. 2 billion NCD programme of Gujarat Ambuja Cements Ltd. (GACL), the rating factors in the GACL’s strong market position in the Indian cement industry, its strong profitability and cash accruals and improved gearing and coverage indicators.

In an another exercise, Icra has removed from rating watch the LA and A1+ rating assigned to Hindustan Sanitaryware and Industries. The ratings had been put under watch following a labour strike in the company’s sanitaryware plant at Bahadurgarh, Haryana, consequent upon a wage settlement dispute. It has also revised the rating of the fixed deposits programme of Bata India Ltd. to MA mainly due to the continued deterioration in the company’s cost structure and competitive position.

Icra has also reaffirmed A1+ rating for IDBI Capital Market Services’ short-term debt programme of Rs. 500 crore, the rating factors in the company’s strong market position in primary dealership, its adequate risk management systems and sound financial position.

Fitch has upgraded the rating assigned to the CP programme of Kirloskar Oil Engines, the rating draws strength from the strong brand and leadership position of the company in many of its products.

Care has assigned AA rating to the proposed Rs. 200 crore Tier-II subordinated bond of Bank of Maharashtra. It has also assigned AA rating to Tier-II subordinated bonds issue of Vijaya Bank for Rs. 250 crore.

Theme of the week:

FMCG : High Volume Amidst Lower Prices

1. The pace of growth recorded by the fast moving consumer goods (FMCG) industry in fiscal year 2004-05 is expected to be the highest in the past five years, following a sharp rebound in rural demand. Despite a lower than optimal monsoon in the preceding year, agricultural production is expected to be closer to all time peak level for the second time in consecutive years. Rural demand is estimated to account for over 55 per cent of sales in value terms for several non-durable consumer goods. FMCG companies have focused on low unit packs to push volumes. Most have shifted from outsourcing to manufacturing in a desperate bid to protect margins in the absence of price increases. So much so, major companies like Marico, Dabur, Wipro and Godrej have began moving back to in-house manufacturing. A report from brokerage firm J B Morgan Stanley says that in main growth drivers continue to be steady income and population growth, urbanization, increase in per capita consumption and increased frequency of use.

2. The industry was hoping that higher revenues and investment in manufacturing locations in tax exempt areas will boost profit. The star performer as in the previous quarter will continue to be the mid-sized that have notched above average growth rates even during tough times. Rural demand and price corrections across categories have resulted in a sharp reversal in growth trends. A number of large and medium FMCG companies like HLL, Colgate, Dabur, Marico and Godrej Consumer Products have or are in the process of setting up manufacturing units in tax havens like Uttranchal, Himachal Pradesh, Jammu and Assam. The impact on performance has began to show in the result of the companies like Marico, Dabur and GCPL.

3. It all started in April 2004 when Proctor and Gamble (P & G) cut the prices of its detergents Tide and Ariel by almost 50 per cent . Immediately, Hindustan Lever (HLL) responded with a similar cut in the price of its best selling detergent Surf Excel. As a result, detergent volumes grew by about 11 per cent this year according to industry estimate. Last year, this Rs. 5,000 crore segment of the Rs. 48,000 crore FMCG industry had grown by only 5.6 per cent. Next was the turn of the shampoos. Here, the lead was given by HLL which dropped the prices of its brands like Clinic All Clear and Sunsilk by as much as 40 per cent. In the end, the Rs. 1,200 crore shampoo market is estimated to have grown by about 7 per cent last year. A study by Assochem concludes that during the October- December 2004 quarter, the industry grew by as much 5.1 per cent. All year end indicators point to a sharp revival in consumer demand in categories with low penetration largely driven by companies reworking the value proportion by introducing low-priced packs.

4. Consumers may now have to bear the brunt of rising commodities prices as FMCG companies begin to hike rates. Prices of sugar, wheat, rice, edible oil and packaging costs have risen by 20 per cent in the past six months and have started hurting the operating margins of companies. Analyst say companies usually choose to hike prices when the economy is bullish in the hope that overall consumer demand will not be affected. While Parle and Britannia have raised prices in the basic glucose biscuits segments, Nestle has upped the MRP of its much hyped Rs.5 priced Maggi noodles pack to Rs. 6. Nestle had launched the Rs. 5 pack recently to drive volumes in a sluggish consumer market. Till recently, most companies had brought down their advertising and promotional spending to protect bottom lines. Analyst say that chocolates, snacks and biscuit major like Nestle, Cadboury’s, Britannia and others will be under more pressure to hike prices than non-food makers in order to maintain quality levels.

5. After having traversed the cycle of boom and bust, the FMCG industry experts opine that the sector still hold potential for a tremendous growth. The industry which has staged a growth rate of about 1.5 per cent (in terms of value) in 2003-04 is expected to grow at a faster pace in the current financial year primarily driven by an increase in consumer spending. After a stagnant growth for around three years, the sector saw signs of revival in growth. The industry as a whole has vast growth potential. The growth in most segments are mainly the result of rising middle class and high income groups. The middle class population in India according to one report , is close to 250 million which is equivalent to the same class of population in the US, the UK, France, Russia, Italy and Japan. The report was released at the third national FMCG conclave organized by the Confederation of Indian Industries. FMCG industry is gearing up to exploit growth opportunities being thrown open by the rural market and expansion of the organized retail sector.

6. Improved growth has encouraged companies like HLL and P & G to raise the prices of detergents because of spiraling input costs without fearing negative impact. In calendar year 2004, heavyweight categories like biscuit grew by 9.9 per cent in volume terms, shampoos by 7 per cent, tooth paste by 7 per cent, while detergents grew by 2.3 per cent. For the quarter ended December 2004 soaps grew by 5 per cent against an annual growth of 1.3 per cent , while biscuits grew by 11 per cent and shampoos grew by 12 per cent. FMCGs are on a roll with sector witnessing growth in both urban and rural markets. While industry recorded an annual growth of 3.4 per cent in 2004, the quarter ended December 2004, witnessed a growth of 6.2 per cent according to AC Nielsen estimate. Industry sources said that trade seems more willingly to increase stock levels and consumer downtrading has been arrested.

7. The bottomlines of toilet soap makers are likely to have improved substantially following a steady decline in the prices of palm oil, a key input in the manufacture of toilet soaps. The global prices of palm oil has registered a steady decline of about 20 per cent over the past few months and has fallen further in recent weeks . Soap manufactures like HLL, Godrej Soaps, Wipro and many others had hiked prices in early 2004 by 15-20 per cent following a sustained rise in crude palm oil prices. According to some industry sources, prices have crashed further after China, the largest buyer of crude palm oil cut its import forecast to 19 million tonnes from the previous 22 million tonnes following a record harvest. Leader HLL which has a 57 per cent market share, calls the shot in the market. It raised the prices of all its leading soap brands such as Lux, Lifebuoy, Hamam and others, while Godrej hiked prices of Godrej No.1 and Cinthol. The price of crude palm oil had risen to around $ 450-500 per tonne from $ 400 per tonne six months ago. Currently, the price is less than $ 350-360 per tonne. Appreciation of the rupee and a fall in input cost will help companies boost profitability in their toilet soap business where margins are relatively higher.

8. In the backdrop of intense price war, brand building through advertisement saw new heights as it was reflected in aggressive product promotions to attain higher sales. “ We have recorded strong double digit growth in 2004, which saw a deficit turnaround for the sector. And, if revival demand stays the way it is now, the year 2005 will witness better growth” said Dabur India’s Executive Director. Products which registered major recovery in terms of higher sales included biscuits, beverages, and toothpaste, shampoos, washing powder, skin creams and chocolates. The real improvement was seen in the July-September period and the next quarter which recorded a growth of 5.1 per cent in value terms. Its impact will be so influential that it will propel higher sales of these consumer goods in 2005-06. However, the only cloud on the horizon for the industry was spiraling cost of key inputs like sugar, wheat, edible oil and packing material. For several FMCG companies, input costs shot up as much as 15 per cent. If most of 2004 was sluggish for FMCG industry, the new year is set to start on an optimistic note . Except for HLL, firms such as P & G, Marico, Dabur, Colgate and Godrej have began showing comparatively healthier bottomlines, signaling indications of revival. 

9. Induced by the spurt in shopping malls, the retail business in the country is slated to grow in the near future. According to one estimate, by 2006 the country would have around 220 malls, a whopping ten-fold growth from a mere 25 malls in 2003. A study conducted by IMAGES, which was published in the form of a book, predicted the ushering in of a large scale of malls in India during 2005-06. Such malls are coming up not only in big metros but also in B grade cities like Indore, Jaipur, Ludhiana, and Meerut. Driven by the increase in number of organized retailers, a distinct change in aspirations of the society and profile of Indian consumers a large number of developers and corporate are realizing the potential. The total space in the six A grade cities like Delhi (including Gurgaon and Noida), Mumbai, Bangalore, Hyderabad, Chennai and Kolkata is expected to increase to over 21.1 million square feet by 2005. Added to it, the expected supply in the key seven B grade cities – Pune, Ahmedabad, Lucknow, Ludhiana, Jaipur, Chandigarh and Indore in the same duration and the grand total comes to about 26.2 million square feet. No wonder, the year 2005-06 could be called ‘Era of Mall Revolution in India’.

10. Meanwhile, industry experts feel whether it is the acquisitions of Balsara business by Dabur India or global acquisitions of Gillitte Company by 
P& G that consolidation will catalyse the growth and ultimately help- the consumer. Dabur’s acquisition of Balsara group companies will give it access to seven well entrenched brands : toothpaste – Promise, Babool and Meswalk, Odonil – air freshner, Odopic – utensil cleaner, toilet cleaners – Sanifresh and Odomous – insect repellent. P & G’s acquisition will give it access to Gillette’s portfolio comprising shaving products, Oral-B tooth brushes and Duracel batteries, among others. Analysts feel that both the acquisition gain on account of much large scale of operations, the two companies will be compelled to make investments in product development.

*These statistics and the accompanying review are a product arising from the work undertaken under the joint ICICI research centre.org-EPWRF Data Base Project.

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