Steadily increasing input costs have pushed FMCG companies to rethink their manufacturing strategies.
Many of them are moving away from contract manufacturing to begin investing in capacity expansion. They have lined up significant investments to set up their own manufacturing plants and according to research firm SSKI Securities, the industry could witness as much as Rs 600 crore investment this fiscal in capacity expansion.
While the reasons for this rush to set up manufacturing plants vary, most relate to the net cost savings these companies will be able to generate when the plants become functional.
Take for example the country's largest FMCG company, Hindustan Lever Ltd (HLL). It plans to invest about Rs 250 crore over the next few months in two separate facilities. When contacted, an HLL spokesperson confirmed the investment quantum, saying that the personal care facility at Uttaranchal has already been commissioned, and the second one in Himachal Pradesh for soaps and detergents is being set up.
Dabur India Ltd has already announced Rs 60 crore investment this fiscal in putting up three manufacturing plants at Jammu & Kashmir, Baddi (Himachal Pradesh) and Uttaranchal, largely for personal care products. Not to be left behind, Procter & Gamble is also thinking in terms of setting up its third facility in Himachal Pradesh, several years after it began sourcing all its shampoo brands from Thailand and other Asean countries. Colgate-Palmolive India, too, has decided on Himachal Pradesh as its investment destination and would be setting up a Rs 50-crore project there.
Says Mr Nikhil Vora, Vice-President Research at SSKI Securities, "FMCG industry has historically shied away from committing significant capital for creating tangible assets. While asset-backed growth was a mere 2 per cent over the past seven years, brand investments grew 11 per cent. But this is set to change, with FMCG companies coming back into a strong capex cycle driven by increased operational benefits in excise and tax savings and strong market growth considerations."
Dabur's Chief Financial Officer, Mr Rajan Verma, said FMCG companies would end up having net savings of 5-6 per cent through capacity expansion. "Shampoos attract 9.6 per cent excise on MRP of which only about 2-3 per cent is modvatable. Taking into account higher transportation costs and the absence of modvat benefit, costs will still be lower through own manufacturing."
Besides, company-owned plants mean better product quality control and economies of scale in raw material procurement.
Says Pranav Securities' CEO, Mr Rajesh Jain: "FMCG companies have traditionally outsourced products like shampoos. But with tax and excise incentives available for companies to set up their own manufacturing, these differentials are decreasing."
Another analyst said manufacturing by itself would give FMCG companies cost advantages since value-added tax (VAT) and MRP-based excise were expected to be introduced soon.