Demand for most packaged food products, which account for 70% of FMCG sales, either fell or remained stagnant during 2010

FILLING UP SHOPPING BASKET

FMCG Riding on Price RiseComing amidst rising input costs, many local and regional players found it difficult to compete with established players on the pricing plank. This made several consumers shift from unbranded product to branded ones as the price differential watered down.

The double-digit sales growth in the consumer product may not be purely on account of growing demand, as widely perceived; it's price increase and popularity of premium products that are driving the value growth.
Data from India's largest household research firm IMRB that tracks consumption trends in several sectors reflects that while demand in most categories remained stagnant in 2010, sales growth was mainly on account of price hikes and the launch of premium products by most companies, which bring in higher revenues to marketers.
In the current inflationary market, this trend is likely to continue even in 2011.
"Coupled with price hikes, we are also seeing grammage reduction in several product categories now, which will negatively impact volume," says IMRB Insights Director Shweta Kulkarni.
Here, sales imply revenues realised, or value, and demand reflects the volume or number of units sold.
"However, there will be a reversal trend in foods, especially branded commodities as most companies have started to drop product prices," says Kulkarni.
Demand for most packaged food products, which account for 70% of FMCG sales, either fell or remained stagnant during 2010 due to inflation in basic items such as wheat and edible oil.
In the case of personal care products, volume growth was average but sales shot up because most companies increased prices and launched top-end products.
"We see consumers shifting to higher priced products, which helped companies increase sales by value," says Godrej Consumer Products MD A Mahendran. "There were also uptrading from local and regional brands to established brands in the personal care segment, which helped increase the consumer base in 2010."
Shampoos and skin-care products grew double digit in value terms despite stagnant volume growth.
All this helped companies report good revenue growth even though volume growth was much higher in 2009.
In 2010, total sales of the top eight consumer product companies in the BSE FMCG index grew 12% over 2009 to Rs 36,085 crore. The net profit growth was 12%.
Only home care segment reported higher sales and increased consumption. Companies including Hindustan Unilever, Reckitt Benckiser and Dabur launched more than a dozen new products in the segment.
"Innovation in product development, resurgence of modern trade and a boom in modern homes have been the key drivers of growth in the home care products market," Dabur's home care category head Rohit Prakash Gupta says.
However, established categories such as washing powder had higher volume than value growth due to price discounting as multinationals Hindustan Unilever and Procter & Gamble went for a price war.

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Stock, Commodity Trades to Attract Uniform Levy

Surplus budget retains standard VAT rate at 12.5%; state sales tax revenue expected to grow 26% from last year

The Maharashtra government has decided to levy a uniform stamp duty of 0.005% on all transactions in the stock and commodity exchanges, including transactions of securities, futures, delivery and non-delivery based transactions. This was announced by the state's finance minister Ajit Pawar in the annual budget presented on Wednesday.
Maharashtra's annual budget shows asurplus of . 58 crore and has a revenue target of . 1,21,503 crore for the fiscal 2011-12. The size of the annual plan has been set at . 41,500 crore. The budget has retained the standard VAT rate at 12.5%, while state sales tax revenue is expected to increase 26% from last year.
Though the finance minister did not specify the revenue projection from the 0.005% stamp duty levied on stock and commodity transactions, he said the move will simplify collection of duty on all such transactions. At present, stamp duty is levied at different rates depending on whether turnover is delivery-based, non-delivery-based, or proprietary. Brokers are required to pay 0.01% for the first category, 0.002% for the second and 0.001% for the third.
The state government has decided to make some amendments in the Bombay Stamp Act 1958 to increase the revenue from stamp duty by 31% in the state. Transactions of transfer of longheld tenancy rights of house property (extension of lease) will now be liable for stamp duty at market value.
The budget proposed to levy a new 5% tax on sale of telecast rights of various events, including cricket matches and entertainment programmes like award shows. It also proposed to increase the rate of tax on soft drinks to 20% from 12.5% and changed excise duty formula for country liquor, Indianmade foreign liquor, and beer in order to increase revenue. The minimum rate of excise duty will be increased to . 95 per proof litre for country liquor, . 240 per proof litre for foreign liquor, . 33 per bulk litre for mild beer, and . 42 per bulk litre for fermented beer. The budget has also proposed change in the VAT structure for liquor. Instead of charging 25% VAT at each stage with deduction for set-off, now 50% VAT will be charged only once at the sale stage based on the sale price of the liquor.
Some amendments for procedures were also proposed in the MVAT Act. These include amendments of revised returns, providing for deposits instead of advance payments for voluntary registration, changes to provisions of refund application to be filed by dealers making interstate sales, etc. The budget proposed stern action against those convicted in Hawala dealings, with two years imprisonment. The budget also proposed . 1,440 crore for providing basic infrastructure facility to the urban poor and . 2,500 crore for various infrastructure schemes under the JNNURM. It has proposed . 2,749-crore expenditure for building roads in rural areas, . 5 crore for construction of a floating jetty at Gateway of India, and . 162 crore for airport upgradation.
In order to promote air traffic in various districts, tax on aviation turbine fuel has been kept at 4% in all districts of the state, except Mumbai and Pune. This scheme of concession will continue till March 31, 2012. The film industry breathed a sigh of relief as the finance minister proposed to abolish the tax on copyright of Bollywood films.
The budget proposed a subsidy of . 2,500 crore to farmers for their electricity bills. Wheat, rice, pulses, flour, turmeric, chillies, tamarind, gur, coconut, cummin seeds, wet dates, fenugreek, and papad have been exempted from tax till March 31, 2012. Domestic liquefied petroleum gas (LPG) will also be exempted from state tax. The finance minister also proposed change in recovery procedure for sugarcane purchase tax. Instead of recovering the entire tax in the crushing season, the purchase tax will now be recovered every month from the sale proceeds.

MONEY TALK: Maharashtra CM Prithviraj Chavan (left) & deputy chief minister and finance minister Ajit Pawar (extreme right) with their colleagues at Vidhan Bhavan shortly after the presentation of the budget in the House.

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Fly High With Commodities

With equities showing no signs of a rebound, investors can turn their attention to commodities, albeit with caution.

 While equity markets globally have not yielded impressive returns in recent times, commodities have more than made up for it. The Sensex has fallen 7% since the beginning of the year while the MCX Comdex, India's Composite Commodity Index, has risen 25% during the same period. In an environment marked by rising inflation, high interest rates, declining industrial production, governance issues and political turmoil, prospects of equities rebounding in the near term appear rather weak. Commodities, on the other hand, have had a splendid run since June last year. Base metals have risen almost 50%; gold was up 16% while silver rose 90%. Yet, the market is still bullish on commodities as an asset class.
    In the second half of 2010, asset classes across the board provided investors moderate returns, making up for the sluggish beginning at the start of the year. This rally was triggered by nascent signs of economic recovery in the US and Europe, and more importantly, by the US Federal Reserve's second stimulus package — Quantitative Easing (QE2). This additional liquidity triggered a spurt in equities, especially in emerging markets like India, reflecting in returns of 17% on the Sensex from June to February 2011. Interestingly, the MCX Comdex rose 30% during the same period outperforming the equity markets — a trend witnessed across the globe. The S&P 500 gained 11% while the S&P Global Commodities Index rose 14% in 2010.
    A key driver for global investors to flock to commodities was the printing of money in the US that saw the dollar lose value against several currencies, coupled with low interest rates in the West. Therefore, relative to other asset classes, commodities proved to be the safest bet, spurring investment. Second, this excess liquidity also led to high inflation, especially in emerging economies — further pushing up commodity prices.
    Strong demand from China and other emerging markets, coupled with supply constraints in Russia and South America on account of climatic adversities, added further impetus to the upward price movement. Commodities across the spectrum fared well. From the agricultural sector, cotton was the star performer, gaining 80%. Silver was the best performer among precious metals, mainly driven by its increasing inclusion in ETFs.
    Whether this trend in commodities will continue hinges on how geo-political issues pan out. The Middle East, North Africa tension has seen base metals correct from their February highs. The Japanese calamity has doused the rally in most commodities in view of the slowdown in demand. A further correction could be expected, but the medium-to-long-term outlook is positive. This is supported by the case for redevelopment in Japan after recent events.
For A Safe Landing
While commodities as an asset class offers good opportunity of making money, it also involves certain inherent risks. Investors need to be aware of them before they start trading
    In India, commodities exchanges provide only futures contracts for trading. Options, a safer alternative, is not currently on offer
    It is pertinent to understand the fundamentals of a commodity, just the way one studies the fundamentals of a company before investing in it
    Investors are subject to high leverage in commodity futures trading. Hence, one must always beware of overleveraging one's portfolio and not trade a contract that is considerably larger than one's risk appetite
    Price action in commodities can become very volatile, thanks to a variety of factors such as geo-political crisis, weather changes and calamities. Investors, therefore, need to be agile while trading.
    The philosophy of 'adhering to a stop loss' needs to be followed even more diligently while trading commodities ET Intelligence Group analyses trends in the most actively-traded commodities to help you cash in on investment opportunities.

In 2010, aluminium prices rose 8% y-o-y fuelled by the recovery in the US and Europe in the second half of the year. Compared with other base metals such as copper, tin and nickel, the rise was muted. The outlook for aluminium is positive as demand remains robust on back of growth in the packaging industry in India, China and Latin America and recovery in the transatlantic markets. However, large inventories are likely to keep prices range-bound in the near term.

Copper prices increased 31% y-o-y on the back of supply constraints, which are expected to continue through 2011, signalling further buoyancy in prices. It has corrected a little from record highs in early February. However, lower inventories and robust demand from India and China will restrict any drastic fall. The outlook on this base metal remains positive.

Corn prices have gone up 80% in the past one year. They are likely to correct in the short term, partly on account of a temporary decline in Japanese demand (Japan being the largest importer) and bearishness ahead of the South American harvest. The outlook is bullish in the medium term as Japanese demand has been delayed and not doused. However, investors cannot expect returns of the same magnitude as last year since the South American harvest is likely to be good this year.

Cotton has been the best performing commodity - yielding returns of more than 145% in last one year. There is an expectation of reduction in demand with prices remaining near all-time high levels. The global cotton production may outpace demand for the first time in seven years. However, the expanding Chinese imports may support demand for cotton. Prices of cotton are therefore likely to remain volatile given such demand-supply dynamics. In India, cotton is competing with food items for acreage. Since prices of food items have risen exponentially they are getting more acreage than cotton. So, while the demand for cotton is optimistic on back of rising consumption, the prices are likely to remain volatile as production is going to be uneven.

The demand-led uptrend in global crude oil prices since December 2010 was further accentuated in January onwards due to the political upheaval in Egypt and Libya. However, the rally was largely psychological rather than fundamental. The global oil inventories have remained higher than the 5-year average and spare production capacity with OPEC has been comfortable. As the political unrest spread across Bahrain and UN prepared to enter Libya the oil prices continue to remain high. However, the disaster in Japan and approaching low-demand June quarter are putting pressure on oil prices. Further, the International Energy Agency noted that high oil prices are dampening demand and lowered its 2011 demand estimate. Unless the geo-political tensions continue, oil prices are likely to drift lower in near term

Gold continues its unprecedented rise in 2010, gaining 30% over the previous year. On account of uncertainty of the global economic recovery and the euro zone debt crisis in the first half of the year, investors rushed to safe havens such as gold. Though these issues have subsided, gold as an asset class is still likely to yield positive returns as uncertainty regarding the pace of economic recovery in Europe and the US continues. In the near term, there could be a correction as the Japanese central bank is likely to continue selling the precious metal to inject yen into money markets in an effort to calm investors.

Silver has had a stellar year in 2010, outperforming gold and yielding returns over 80% against the previous year, driven by investment demand. In 2010, silver holdings in ishares ETFs rose 15% touching an all-time high. It would be prudent to book profits in silver at this point and wait for a correction. Given that the rise in silver is also linked to industrial metals, any correction in the latter could cause a dip in silver price.

Soybean oil futures prices have risen over 42% in the past one year. However, they have been trading sideways for the past three months. They are likely to remain weak in the short term due to advance in harvesting activities in South America, expectations of a higher supply of soybeans this year and present weakness in crude oil prices. Prices are also likely to weaken around May-June period on the back of fresh production of palm oil from Malaysia. However, they are likely to rebound later in the year. Edible oil prices are closely linked to energy prices due to their use in the production of biodiesel, an alternative to fuel. Hence, any major spike or correction in crude oil prices will have a similar impact on soy oil prices.

Global sugar prices touched an all-time high in February due to the Australian cyclone and remained volatile since then. According to the latest analyst estimates, raw sugar future prices are expected to see a correction due to better production in Brazil in May 2011. In the domestic market, sugar prices are expected to trade in the range of 28-30 per kg in the short term. They are likely to correct in the case of any upward revision in the sugar production estimates which currently stand at 25 million tonnes for the current sugar year (October 2010-September 2011) against the consumption of 22 million tonnes.

Among all the base metals, zinc was the only underperformer in the past year, yielding negative returns. This was primarily because for the fourth consecutive year, global output of refined zinc exceeded its usage. While the surplus is expected to be lower in 2011, its impact is not likely to see any major improvement in prices. So, while the rise in the price of zinc is on the cards, it may not be very significant.
    crystal.barretto@timesgroup.com 
    (with inputs from Rajesh Naidu, Ramkrishna Kashelkar and Shikha Sharma)

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High Volatility: Steelmakers will Switch to Monthly Deals

High-value product suppliers of car industry may change method of agreements

Specialised steelmakers, who supply high value products to the car industry, could be the first to switch to monthly contracts from quarterly agreements to reduce risks arising from increased volatility.
While this would be the first time that a crucial supplier to the auto sector will be moving to a monthly cycle, it would also leave room open for frequent product price revisions, say people directly involved with the industry. Specialised steel includes high value alloy that accounts for about a fifth of the total cost of a car.
In fact, the alloy steel companies have raised prices by about 25% in the past three months and are planning to revise upward yet again in April. "These are uncertain times. Both the buyers and sellers are scared to stay locked-in for longer periods," said Niraj Bajaj, chairman and managing director of Mukand Ltd, the largest alloy steel player in India.
"While this (the monthly contract) is not healthy, we hope stability returns soon," he added.
Mukand, like Kalyani Steel, Mahindra Ugine, Usha Martin and other alloy steel makers supplies vital components to the car and two-wheeler industry and is a major driver and indicator of the price of cars.
In most other sectors, the switch to monthly is being strongly resisted. Typically, a quarterly supply contract gives companies enough flexibility to devise production schedules and study price outlook for coming months. A monthly system would however make such schedules go awry. This is the reason that industries such as metals and power, are resisting the move by miners to switch to monthly contracts.
Since February, major global miners such as BHP Billiton and Rio Tinto have been forcing steel mills to shift to monthly contracts to arrest volatility in prices of coal. Prices of the mineral has fluctuated violently in the past three-to-four months due to tight supplies on floods in Australia and growing demand from steel and power generating companies in China and India. Spot prices of coking coal last month touched record levels of $300 a tonne when contract prices were at $225, forcing miners to back out of contracts and disrupt supplies.
"After 40 years of working with annual supply contracts, in March last, the global order changed to quarterly. Only a year has passed and already they are thinking of changing to monthly, which is too soon," said a Mumbai-based commodity analyst who is familiar with the move by alloy steel players.
The influence of alloy steel makers is evident. Car makers have accepted the switch and are making preparations to adopt the new system. Maruti Suzuki, the country's biggest car maker is still on quarterly contracts, but wouldn't delay in making the jump. "Monthly contracts will make predictability higher and we can forecast better," said Mayank Pareek, executive officer (marketing and sales), Maruti. But the previous contracts also had scope for revisions. According to Mr Bajaj, the earlier contracts had provisions for revision in prices after every month. "The story on raw materials is similar for us too. Hikes in prices of iron ore, coal and other minerals have led to a cost push and we are forced to raise prices," said Mr Bajaj.
But along with raw material push, strong demand patterns too have contributed to the switch. When China emerged as the world's largest consumer of steel, its hunger for iron ore pushed up prices sharply and the annual contract system was replaced by the quarterly system. Increased volatility has again brought out similar demands.
The Indian alloy steel industry makes a total of 4 million tonnes annually, according to the Joint Plant Committee of the steel ministry.

Oil, Gold Flare Up as West Asia Boils

Real worry for India is turmoil may spread to major oil producers such as Saudi Arabia

Global oil prices surged again while precious metals soared as tension in Libya and fears of unrest in Opec heavyweight Saudi Arabia spooked markets, mounting pressure on India, the world's biggest gold buyer and Asia's third-largest oil consumer.
Fears that oil-sparked inflation will erode the value of other assets encouraged investors to turn to gold, hoisting the precious metal to near-record levels as it glittered as a safe haven for investors in turbulent times.
As fighting in Libya raged, US crude climbed 1.5% to $106 a barrel while Brent crude rose by a similar amount to trade at about $118 a barrel. While Libya accounts for barely 2% of oil supplies, the real worry for India is the prospect that the turmoil may spread to major oil producers such as Saudi Arabia.
Oil companies in India said state-set diesel rates are 10 below market levels while petrol is about 3 below market rates. State-run oil companies are technically free to raise petrol prices, and they have done so nearly 10 times in the past year, but they are reluctant to increase prices, fearing retribution from the ruling party, which faces crucial elections in four states.
The central government has struggled to control inflation, which has become a rallying point for opposition parties. Key government allies, such as Trinamool Congress, have criticised any move to raise prices in the past, and with elections approaching, the government is likely to go slow on price hikes, particularly of diesel, kerosene and cooking gas, for a couple of months.
The government is hoping oil prices will retract to pre-crisis levels of near $80 a barrel.
Crude Threat Across Globe
BRENT CRUDE UP 1.5% TO $118 GOLD RISES TO 21,500

• Tension in Libya and fears of unrest in Opec heavyweight Saudi Arabia spook markets

• Fears of inflation eroding value of other assets encouraged investors to turn to gold

• India is the world's biggest gold buyer and Asia's third-largest oil consumer Govt Pins Hope On Oil Fall
Analysts and oil industry officials said it is hard to predict how oil prices would move. A Citigroup report said "nobody really has a clue as to how the crisis in the MENA (Middle East North Africa) region will develop, largely because no one saw it coming in the first place". "We think what is happening in the MENA matters and that markets are increasingly vulnerable, not because higher oil prices are an inflation threat in the longer term, but because they threaten growth."
Oil ministry officials said any decision to raise fuel prices will be taken by an empowered group of ministers. The government is expected to continue its existing policy of dividing the burden between upstream companies like ONGC, consumers and the government. This could upset the finance minister's fiscal calculations as the government has budgeted for a lower oil subsidy bill in 2011-12 compared with the current year.

Ban Futures Trading in Essential Commodities: Modi-Headed Panel

Group suggests price stabilisation funds to fight inflation, ministerial-level co-ordination mechanism

A Working Group on Consumer Affairs headed by Gujarat Chief Minister Narendra Modi has recommended setting up of a price stabilisation fund and a ban on futures trading in essential commodities to fight food inflation. It also suggested a ministeriallevel co-ordination mechanism at the national and regional levels for policy formulation to evolve a single national agriculture market.
The group, which submitted its report to PM Manmohan Singh on Wednesday, gave 20 suggestions with 64 actionable points. The committee, with CMs of Tamil Nadu, Andhra Pradesh and Maharashtra as other members, was of the view that a price stabilisation fund set up by the Centre will help states in procurement and distribution of essential commodities in short supply.
On future trading, the group concluded that considering absence of strong linkages between spot and future markets, essential commodities should be kept out of the future market.
However, the government has been maintaining that there was no proposal to ban futures trading in essential commodities on the ground that no study has identified it as one of the reasons for increase in food prices.
Formed by the Prime Minister in April, 2010, in the face of soaring food inflation, the group also suggested liberalisation of agricultural markets to improve distribution from farms to consumer, increasing participation of organised sector and co-operatives in retailing to promote competition and priority lending to agri-market activities. It also recommended focusing on time-bound development of agri-marketing infrastructure including storage capacities in food deficit regions, cold chain and agro-processing besides unbundling of Food Corporation of India operations of procurement, storage and distribution. The group has recommended enlarging the scope of priority sector lending such that the agriculture marketing activities are made eligible and raising the ratio of priority sector lending to the agriculture sector further from the current level of 18%.
To minimise information "asymmetry" in the agri market, the report called for establishing a mechanism to collect and disseminate information to all stakeholders on production, import, stocks and overall availability of essential commodities besides extensive use of the Information Technology. This could be done by setting up a dedicated agency for it. It suggested preparation of a 10-year Perspective Plan for improving agri-infrastructure.

FIGHTING PRICE RISE: Modi (R) submitting report to PM Singh