Companies & Sectors
New packaging regulations may affect growth and margins

FMCG players will lose flexibility to adjust weight, high probability of price rise

The new packaging rules, which enforce uniform packaging for 19 product categories, may impact packaging costs and lead to price rise, says a report by brokerage firm Motilal Oswal.

“We believe the new norms would impact volume growth in the medium-term as companies modify pack sizes. In cases where the pack size has to be increased, there is also a high probability of prices rising. This could impact volume growth, especially for products driven by low price points”, says the report.

The new regulations will come into effect from 1 July 2012. According to these rules, companies need to move to nearest standard units, for e.g. 25g, 50g, 100g, etc. The new regulations would initially cover 19 product categories with major ones being biscuits, toilet soaps and detergents. It would also cover paints, baby food, milk powder, tea, coffee and edible oils.

The industry is in discussion with the government for relaxing norms for small packs due to the affordability issue. When input prices go up, FMCG (fast moving consumer goods) companies generally tinker with weight while keeping the prices same, usually at lower price points. This often made it difficult for consumers to compare prices, and they ended up paying the same price for a lesser quantity. The report says that some companies have reduced their pack sizes by almost 20% in the last two years.

However, the new regulations will not allow the companies to tinker with grammage. The report says that this will effect volume growth, especially of products which are driven by low prices. There is a chance then that the price of larger packs will increase. “As consumers take time to get accustomed to new pack sizes and adapt their shopping behaviour accordingly, volume growth would also suffer,” the report added.

“While the initial adjustment might not be much of a problem, barring a few stock keeping units (SKUs), changing prices post that would be a hassle. Changing prices will become increasingly difficult as coinage issues arise (coins less than Rs0.50 denomination would be phased out from June 2012). Increasing prices by 10%-20% at one go would be very tricky,” the report says.

The report further says that Britannia, Hindustan Unilever and Nestle India would feel the maximum impact in the medium-term, and biscuits, toilet soaps and coffee will be the most affected in their product segments.

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COMMENTS

Narendra Doshi

5 years ago

Belated but consumer friendly move at long last. Hope it gets implemented in toto and also covers other possible inclusions.

Deepak R Khemani

5 years ago

A good regulation finally in the customer's interest, whereas until now, the customer was continuously being CHEATED by getting big packs with lower weight of the actual product. Biscuits went from 100gms to 93gms to 82.5gms. Detergents went from 1 Kg to 950 gms, 875 gms and so on. At least now you will get a FAIR idea of what you are actually buying!

A rally likely: Thursday Closing Report

Watch for 5,460 on the Nifty

A decline in economic growth in the December quarter, which was at an over two-year low, saw the market snapping its two-day gain and closing lower today. A marginal decline in factory output numbers for February also weighed on the market. The downtrend on the Nifty may see a pause soon. The index is likely to see an upmove to the level of 5,460. The National Stock Exchange (NSE) saw a volume of 86.29 crore shares today.

The market opened lower tracking the weak Asian markets in morning trade, following US Federal Reserve chairman Ben Bernanke deferring an announcement of any new policy package that would steer growth. The Nifty opened 19 points down at 5,366 and the Sensex resumed trade at 17,715, a cut of 38 points over its previous close.

Although in the red, the indices touched their day’s highs in early trade with the Nifty at 5,372 and the Sensex at 17,718. However, all-round selling pressure led all the sectoral gauges lower. A marginal fall in manufacturing activity in February, as shown by the HSBC Factory PMI, also weighed on the investors.

A lower opening of the key European markets added to the woes in post-noon trade. Besides, the 5% stake sale in ONGC also saw investor interest shift towards the company. The benchmarks fell to their day’s lows a little after 2.00pm. At the lows, the Nifty went down to 5,298 and the Sensex dropped to 17,463.

Bargain hunting, after the indices hit the lows, helped the market pare some of the losses in late trade but the gain lacked strength to push the market into the positive. Finally, the Nifty closed 45 points lower at 5,340 and the Sensex declined 169 points to 17,584.

The advance-decline ratio on the NSE was 708:1039.

Among the broader indices, the BSE Mid-cap index declined 0.53% and the BSE Small-cap index fell 0.38%.

BSE Healthcare index (up 0.25%) was the lone gainer today. The top sectoral losers were BSE Realty (down 3.29%); BSE Capital Goods (down 1.62%); BSE Bankex (down 1.20%); BSE Oil & Gas (down 0.95%) and BSE Auto (down 0.90%).

The top Sensex gainers were Maruti Suzuki (up 4.64%); Hindalco Industries (up 1.35%); HDFC (up 0.98%); Tata Power (up 0.91%) and Coal India (up 0.09%). The losers were led by DLF (down 5.17%); Mahindra & Mahindra (down 3.67%); BHEL (down 2.97%); NTPC (down 2.54%) and ICICI Bank (down 2.44%).

The Nifty toppers were Maruti Suzuki (up 5.20%); Ambuja Cement (up 3.27%); Siemens (up 2.48%); Reliance Power (up 2.22%) and Cairn India (up 1.84%). The key losers were DLF (down 6.40%); M&M (down 3.94%); IDFC (down 3.75%); BHEL (down 3.06%) and Axis Bank (down 3.04%).

Markets in Asia settled mostly in the negative as the US Fed chairman on Wednesday refrained from announcing any fresh measures to boost the economy. A fall in bank lending in China in February resulted in the Chinese and Hong Kong markets settling down while profit booking saw the Nikkei 225 closing in the red.

The Shanghai Composite lost 0.10%; the Hang Seng tanked 1.35%; the Jakarta Composite slipped 0.58%; the Nikkei 225 fell by 0.16%; the Straits Times dropped 0.51% and the Taiwan Weighted lost 0.04%. Bucking the trend, the KLSE Composite gained 0.24% and the Seoul Composite surged 1.33%. At the time of writing, the key European indices recovered from their early losses and were marginally in the positive and the US stock futures were trading higher.

Back home, foreign institutional investors were net buyers of stocks totalling Rs579.63 crore on Wednesday. On the other hand, domestic institutional investors were net sellers of equities aggregating Rs431.07 crore.

Tata Communications (TCL) today said it is considering an acquisition bid for London-listed telecommunication giant Cable & Wireless Worldwide Plc (CWW). TCL said "considerations are at a very preliminary stage and there can be no certainty that an offer will be made”. The stock added 0.15% to close at Rs234 on the NSE.

In a move which should caution power developers to avoid illegal dumping of waste like excavated debris, the Department of Forests, Environment and Wildlife in Sikkim has fined NHPC Rs75 lakh for violation of forest laws and unauthorised dumping of muck at Elaichi Khola and the area downstream of Teesta Stage V in East district. The stock gained 1.89% to close at Rs21.60 on the NSE.

At a time when overall credit growth in the economy is slackening, Pune-based non-banking finance company Bajaj Finance (BFL), is focussing on retail lending opportunities in India. It expects to expand its loan book at 25-30% in FY11-12.The stock dipped 2.34% to close at Rs772 on the NSE.

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Fresh round of loan recasts to be riskier for banks, says Barclays

‘We are concerned about the high level of loan restructuring being undertaken by the domestic banks:’ Barclays report.

The banking system is likely to face a bigger challenge from the restructured accounts in the current environment than they had faced after the global credit crunch following the sub-prime crisis during 2008-10, says a Barclays report.

"We are concerned about the high level of loan restructuring being undertaken by the domestic banks because we expect their experience with loan restructuring in the current environment to be worse than in FY09 and FY10," the research report said. As per the report, the monetary easing played a major role in easing debt burdens in the past round of debt restructuring, which is not the case in the present situation.

"Monetary easing played a major role in easing debt burdens in the past. Furthermore, borrowers were also able to recapitalise and manage their debt burden by taking on unhedged forex liabilities. These factors are unlikely to be repeated in the current round," the report notes. The report, however, points out restructuring standards in the country are not stringent.

"Restructuring standards appear lax and (to) create perverse incentives...specifically, restructuring is allowed even if the promoter 'sacrifice' is only 15 percent of the bank's sacrifice. Hence, borrowers can restructure with very little sacrifice, which we believe reduces the discipline that the threat of default normally places on the borrower," it warns.

It also says the provisioning norms are relatively low in comparison with those of other Asian economies and don't confirm to the accounting principles of conservatism.

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