Excise duty to hit companies with weak brand recall
March, 11th 2011
The Budget proposal to impose excise duty on branded garments may put more pressure on retail companies, given the sector is already grappling with high raw material prices.
The excise duty can hurt the entire chain from the garment manufacturer, such as Arvind mills, to independent brands, such as Provogue, to retail companies such as Shoppers Stop , Trent and Pantaloon Retail . Those with low bargaining ability and weak brand recall among consumers will feel the pinch harder.
The proposal has accentuated the concerns of retail companies at a time when they are battling rising cotton prices, which constitute an important component of the input costs for retail textile companies.
The cost of raw materials, including cotton and intermediates, accounts for 40-60% of sales. In the past six months, cotton prices have doubled to 168 per kg (Shankar 6 variety). These are expected to increase further since industry trackers feel that demand this year may outstrip supply.
Most retail companies have already announced a 15-20% increase in their products to tackle the pressure of rising costs. It is likely that they will pass on the excise duty of 10.3%, which will be levied on 60% of Maximum Retail Price (MRP) of products, to consumers. If that happens, garments would be dearer by around 27%. A branded garment with an MRP of 1,000 would cost over 1,270 assuming a price hike of 20% and an excise duty of 10.3% on 60% of the MRP. Experts feel this could impact volumes thereby reducing 1-2% in net profit of retail companies.
The companies with a higher raw material cost to sales ratio would be the worst hit. For instance, at 65%, Provogue India's input cost proportion is way higher than the 35-36% for Zodiac and Kewal Kiran.
However, companies with higher input costs but a stronger brand recall such as Page Industries , which sells the Jockey brand of innerwears, will have a better ability to pass on the higher cost burden effectively. Profits of such companies, therefore, will not be impacted much. Increased documentation could be another repercussion of the Budget proposal.