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Consumer goods heading for biggest expansion

Consumer goods heading for biggest expansion

Author | exchange4media News Service | Saturday, Dec 18,2004 8:49 AM

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Consumer goods heading for biggest expansion

Encouraged by tax incentives, Indian consumer goods makers are shrugging off a year of sluggish growth and embarking on a record spending spree to increase production in anticipation of a pick-up in demand.

Despite competition from smaller players, a bloody price war between market leader Hindustan Lever Ltd. and Procter & Gamble earlier this year and a weak monsoon that may crimp rural spending, big consumer goods firms say they are set to turn the corner.

Godrej Consumer, Marico Industries, Colgate-Palmolive, Dabur, Nestle and Britannia are all gearing up for more production, with capex spending of the top seven listed companies adding up to more than 5.5 billion rupees.

"We are definitely seeing an improved demeanour in the market," said Hoshedar Press, executive director of Godrej Consumer, which has spent 220 million rupees on a plant to make 25,000 tonnes of soap per year in Himachal Pradesh.

Among equity mutual funds, those investing in personal care gave the highest returns in November, rising an average 15.1 percent. The sector index has broadly matched the Bombay share index,, which has surged more than 13 percent to record highs since Oct. 1.

The new expansion amounts to the largest ever for the sector, which has annual sales of 600 billion rupees, and is being driven by switching to in-house manufacturing rather than outsourcing and a desire to boost margins as growth flatlines, analysts said.

"The aggressive capex drive is because of internal and market growth considerations, increased benefits in excise and tax savings and a tilt toward make versus buy," said Nikhil Vora, a vice president of research at SSKI Securities.

"It also indicates a revival in consumer demand."

MORE SUDS, LESS TAX

Plants to make soap, toothpaste, shampoo, detergent and face cream have sprouted in the hilly northern states of Uttaranchal, Himachal Pradesh and Jammu and Kashmir, where state governments commonly dangle tax breaks to help out poorer areas.

Firms building plants with new machinery in these states are spared excise payments for 10 years and income tax for five years.

Hindustan Lever, the Indian unit of Anglo-Dutch Unilever, has set up a plant to make face cream and shampoo in Uttaranchal and a unit for soap and detergent in Himachal Pradesh at a total cost of about 2.5 billion rupees. The overall capacity of the two factories is about 155,000 tonnes.

Colgate is investing about 700 million rupees in a plant in Himachal Pradesh that will produce 20,000 tonnes of toothpaste a year, Dabur has invested 550 million rupees in all three states to make hair-, oral- and over-the-counter health-care products.

Vora estimates Lever will see a net benefit of 2 billion rupees, Colgate -- which currently outsources about half its production -- will save around 283 million, Godrej about 115 million and Dabur 300 million.

"These savings are likely to be deployed back as advertising and promotional expenses, or lower consumer prices," Vora said.

Though India's economic growth is cooling, company executives expect to feel a lag effect of last year's 8.2 percent expansion.

They also highlight rising popularity and falling prices of premium brands and the roll-out of a centralised value-added tax from April next year that is seen lowering the tax burden on consumers.

"We are just seeing the first phase of improving volumes, which would signal that the consumer base is growing," said Atul Rastogi, an analyst at Motilal Oswal Securities. "That may eventually give companies the confidence to raise prices."

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