Fast moving consumer goods (FMCG) major Marico may be prepared to transition to the new tax regime, goods and services tax (GST) but expects the June quarter to be impacted because of this transition. In an exclusive interview to CNBC-TV18's Priya Sheth, Marico's Harsh Mariwala said that the company is prepared for some degree of degrowth.
Fast moving consumer goods (FMCG) major Marico may be prepared to transition to the new tax regime, goods and services tax (GST) but expects the June quarter to be impacted because of this transition.
In an exclusive interview to CNBC-TV18's Priya Sheth, Marico's Harsh Mariwala said that the company is prepared for some degree of degrowth.
Below is the verbatim transcript of the interview.
Q: For an industry that has been recovering from the blues of demonetisation and with GST coming about, it is just close to becoming a reality, how do you think the industry is poised, do you think there is some bit of uncertainty even now?
A: You are right, I think demonetisation was not expected and it happened all of a sudden and that had its impact in October to December quarter as well as January to March quarter and GST has been in the offing for last many years but the fact is that it is getting final launched is a positive thing.
There will be some short-term pain but these short-term pains are good from the long-term point of view. So short-term pain for long-term gain is okay. We may suffer a little bit in this quarter maybe to some extent in the next quarter because it is a big reform, one of the biggest reforms in the area of indirect taxation which has occurred in India.
I must compliment the finance minister, the GST council for moving at a very fast pace because it is a very complex thing to implement and change the way of working not only for the FMCG industry but for all the industries.
So yes, in short, there will be some pain because many of our stakeholders especially our distributors, wholesalers, millions of retailers, they have to work in a different manner. So are they ready? I am not sure, they may not be fully ready. They will go through the learning curve and there may have certain fears also that okay what will happen if I am overstocked, there is also a fear that post July, the prices of some of the items will go down. So it is best for me to reduce my stocking levels.
So to that extent, there will be some supply chain issues in terms of our primary sales going down. Hopefully the retailer will not get stocked out of the items so the FMCG consumer will not get impacted because of stock outs. But we have to wait and watch and see how this pans out.
Q: Now the government has given some sort of clarity as far as rates are concerned, what is your assessment of the overall rates?
A: Let me begin with the process of how they are evident rates. I must compliment again the way they handle this situation because with so many states and so many items and some states being passionate about certain items, I think the fact they looked at a very mathematical way of finalising the rates, which meant that what is the current excise duty, what is the current weighted average of VAT and fix that item in the nearest category of the band, whether it should be 12 percent or 18 percent or 28 percent, that exercise was done with the right level of thinking. So there was no scope for lobbying or jockeying for some items to be kept at a higher rate or lower rate because it was a completely mathematical exercise. So it paved the way for faster conclusion of the rates being finalised in GST council.
Having said that, I think in certain items, which are used by the common man, the government has been sensitive that the rate should not be on the higher end. So they have made certain exceptions for keeping the rates at a lower rate and some cases they changed it also in the last GST council meeting. So all that is for good. I think I must say that overall rate reaction from FMCG is good except barring a few sectors or certain categories of products where rates are on the higher side. Specifically, personal care products and would fall in the 28 percent bracket.
Q: Talking specifically about Marico, 18 percent is the slab that has been decided for hair oil which is a bulk of your portfolio, it is slightly lower than rates that have been applicable so far, how do you view this as an advantage? Would there be possible benefits that you would pass on to consumers?
A: Most of us in FMCG industry as of now are located in a backward area which entitles to excise benefit, so we are present in Assam or the north-eastern states and all of us are present. So on paper, it may look that the rates are lower compared to but the fact that we are enjoying excise exemptions and the VAT is nowhere near 18 months lower than that means that we have to see to what extent the government is going to give us a credit for the excise exemption and then we will see how it pans out but we will have to watch and see and if there is a benefit, definitely it should be passed on.
Q: On an overall level do you think there could perhaps be some sort of benefits?
A: Long-term point of view because excise benefits are there for a certain period. So from a long-term point of view, it is good. From a short-term point of view, we will have to see what is the actual effective rate we are currently paying, what is the set of and then as I mentioned earlier if there is a benefit, we will not adhere to pass it down.
Q: In terms of hair gels and hair creams that has been taxed at about 28 percent and that is much higher than what has been at present, how do you view this in terms of the kind of consumers who use these products?
A: These products are categories of the future. People are shifting as the modernisation occurs in their own habits, so they are going up the value chain. So if they were using hair oils, they are going to hair creams. For styling, they would going to use hair gels, so at one level the overall usage as of today is low but the potential is going to be high over the period of time. Considering that the higher tax rate will to some extent impact the future growth rates because of relatively higher price points.
Q: At this point in time, the industry is waiting to transition in to the whole GST era. At Marico, what are the systems and processes that have been put into place to transition into the new regime?
A: One is the compliance is in terms of the GST network and filing and all and that is going on for some time, was not only Marico but most other FMCG companies are well prepared to transit to a new phase of compliances, reporting, filling in the form formats, to me that is minor issue.
Larger issue is how do I cope up in the discontinuity in supply chain because of this reduction and stock level and number three from a long-term point of view how do I manage my logistics. So logistics provide certain opportunities for savings logistics cost including the location and I think we are almost ready in terms of what we should be doing and we will implement that during the course of the year.
Q: Before I come to the logistics, I wanted to understand what is the kind of conversation that you are having with distributors, trade partners and retailers at this point of time?
A: Conversations are that there should not be any fear first of all. Fears are unfounded. The government has gone on record saying that the first three months they will be more lenient if some retailer has not been able to comply with the requirements they will take a little liberal viewpoint. So I think one is those fears that are unknown, put them at rest.
Number two, wherever the rates may go down, we have to give depending on what is our basket of products where we see rates either remaining stagnant or going down where and whether we see it may be going up in some cases also, we have to sensitise the trade and if we can in the short-term wherever offer products that are little lower at some discounts so that whenever the rates are lower because of GST then to that extent, they don’t reduce their stocking levels.
So I think a lot of reassurance that we are that partners and whatever help they require in terms of the GST launch as well as some of the fears of the unknown, I think we should use this opportunity to basically sensitise the trade and the distributors and the wholesalers.
Q: Would there be a possibility of increasing margins at this point in time for them and also on the reimbursement front would there be some sort of differential taxation, reimbursements that you would be helping retailers and wholesalers?
A: I do not think we can help them in reimbursements because the numbers of retailers who stock our products can go to millions, so it is very difficult physically for us to play that role. They will have to do that on their own.
Coming to your second question on margins, I do not think any FMCG company should use GST to increase margins. I think it is a move which is championed by the government. The government has been very fair and they also have said that if somebody misuses it in terms of increasing margins, there will be anti-Profiteering laws. So, I do not think one should look at it from that angle at all. I think one has to look at what is good for the consumer and if need be reduce rates wherever there is a reduction in GST rates.
Q: In terms of savings from the logistics front point of view, what could be the tune of savings that Marico could benefit?
A: It is not as large as it is made out to be. I read somewhere that they are talking 1-2 percent, I do not see it anywhere near that. It will be much-much lesser. I do not have the exact figure but it will be much-much less than 1 percent. But other benefit which may get and one doesn't know, is that the trade is not reporting and there are certain players who are evading taxes and hopefully they will get eliminated. So the organised sector will benefit because of the fact that the unorganised sector which was evading taxes and getting an advantage because of tax evasion, that advantage will vanish and we see that as a bigger opportunity rather than saving in logistics costs.
Q: In the short to medium-term do you expect demand to be slightly impacted and would this mean that at Marico you would perhaps step-down production at least so that you can cater to demand?
A: As I said April-June is definitely getting impacted, so our production planning is quite flexible depending on what is the demand but it is not something which is going to cause job losses. I do not think it is to that magnitude. It will be a single digit impact in terms of some negative growth. I think it is something which we have to bear and we have to move on.
Q: Is there some number in terms of how much production you would look at reducing, any percentages?
A: As I said it is a low single digit figure. I do not have the exact number but it will be in the range of 5-10 percent, most likely 5-7 percent.
Q: In terms of clarifications from the government at this point in time there are still some grey areas where the industry wants more clarity from the government. What according to you would be perhaps the few areas where clarity is required at this point?
A: The government has taken enough steps in terms of providing clarity and some of the issues which are open yet, will get decided on August 18th. Those issues are relating to profiteering approach and laws but as for FMCG industry, most of the clarification has come in. In some cases where we didn't have clarification and we approached the government and the government was very swift in terms of making the change in the last GST council meet.
Q: In terms of growth going ahead what is your anticipation - FY18. Will that be better than FY17?
A: I think the short-term impact, one is not able to predict but if I look at '17 from Q3 onwards and if I compare that so October to December and January to March, the second half of '17-18 will definitely be better than second half of '16-17.
Q: But overall on growth trajectory?
A: I do not know what is going to be this quarter and next quarter's impact. It's a bit unpredictable to some extent so one is not able to predict but it is okay, we are prepared for some degree of de-growth but it is not something we have to pay the price to get the long-term gain.
Q: The FMCG industry has been focusing on volume growth. I think that is one major factor that has been a major concern for them over the last few quarters. Do you think that volume growth will be back on track perhaps by Q3?
A: I would think so. Hopefully monsoon will be normal as predicted, so I reckon that Q3 onwards the growth will be better.
Q: And for Marico specifically, when can we expect a continued double digit volume growth because 10 percent was the domestic volume growth?
A: I think October onwards it will be higher than what it is. I hope it crosses double digit. I am not able to predict that but definitely it will be higher than what is the current average.
Q: Keeping in mind the GST, what will the focus be for Marico in terms of product launches and also on the whole pricing aspect?
A: I do not think the product launches in our portfolio choice gets determined by GST. So it is completely disconnected and it is not at all related to GST. Separately, we do not talk too much about what new products we are going to launch but fundamentally they will be in the area of beauty and wellness and that is our strategy going forward.
Q: Are you happy with 5 percent for edible oil because Saffola is also a major part of your portfolio?
A: Yes but currently edible oil's effective tax rate is -- I do not have the exact number but in that range is a single digit number but I am happy that it is in the 5 percent bracket.
Q: And profitability is going to be on the upswing?
A: No, I do not think we should look at GST from profitable point of view. That is the wrong way to look at GST; GST has to be looked at from consumer angle, in fact it is going to bring in some other benefits apart from reduction in tax rates, benefits are going to be more benefit or more sales going to the organised sector, some savings in logistics costs and things like that. I think that should be the focus rather than earning extra margin because of high prices.
Q: As far as bottlenecks are concerned, what according to you would be the hurdles that you would face in transitioning to the new regime?A: As I mentioned earlier it is the hurdle that have to do a lot with the trade and how the trade copes up with this and to what extent can we influence the trade to cope up with this. So I would say supply chain seems to be the biggest area of learning curve, biggest area of chain management and we are all prepared for some degree of disruption in that but hopefully the disruption will not last long; it will be short-lived and it will not impact our sales in a big way.The Great Diwali Discount!
Unlock 75% more savings this festive season. Get Moneycontrol Pro for a year for Rs 289 only.
Coupon code: DIWALI. Offer valid till 10th November, 2019 .