The central government’s big bang move on structural reforms announcing a spectrum of tax cuts in September this year has changed the narrative of the country and more so has converted the slowdown sentiment to a positive one. The advertising industry tends to be highly sentiment-driven and is estimated to see an additional Rs 5,000 crores in the advertising market between October and March of this financial year. The corporate tax cut to 22% from 30% and that of new manufacturing companies from 25% to 15% will lead to an increase of Profit After Tax (PAT) for companies, which can further be allocated towards advertising and marketing. Illustrating how the tax cut will impact companies and the industry at large, Lara Balsara Vajifdar – Executive Director, Madison World, says, “The corporate tax relief is supposed to cost the Government Rs 1,45,000 crore. This means PAT of India Inc. will go up by this amount. There will be several demands on this additional money. These are:
• Demand from shareholders for more dividend
• Demand from consumers to lower prices, which will also make the brand more competitive
• Demands for additional investment in capacity expansion, modernisation etc.
• Demand from marketing to increase advertising allocation
Whilst different companies, depending on their category will utilise the additional money differently, it will be fair to assume that consumer companies that use advertising to build their brands and competitiveness in the marketplace will use some of this money towards advertising. A realistic estimate would be that about 5,000 crores extra will come into the advertising market between October and March of this financial year. This will go a long way in meeting the shortfall in spends in the first months.”
BRINGING RELIEF IN TOUGH TIMES
This announcement has come on the back of three tough quarters, which were pulling the economy and company balance sheets towards red. McKinsey & Company, the American worldwide management consulting firm, in its recent article on ‘Resilience in TMT: Winning in downturns’ highlights, “Economic downturns hold substantial
opportunities for companies in the technology, media, and telecommunications (TMT) sector. By starting now to build an action plan and execute no-regret moves, companies can put themselves on a path to emerge resilient through the next slowdown.” The article further through McKinsey Research points how you manage through a slowdown largely determines how you come out the other side, not just in immediate recovery but for several years after. The key strategic actions pointed out by the article are increasing the productivity and amount of their sales and marketing investments, continuing to invest in their core product engine, creating capacity by reducing leverage going into the slowdown and remaining active in M&A and divestments.
The move has come on the back of a difficult quarter, when organisations across the spectrum are seeing a slump and are reeling from a tough quarter. Raj Nayak, Founder, House of Cheer, opines that this is a move that has come in a tad late but is a great initiative nonetheless. “This will definitely help all the corporates, and I’m sure that the money that is saved will be ploughed back into advertising, bringing back more customers and resulting in a positive sentiment overall. Everyone is hoping for change, and the proof of the pudding will only come at the end of the next quarter,” he remarks.
Days after the government’s corporate tax rate cut was announced, Maruti Suzuki reduced the price of select models by Rs 5,000 (on ex-showroom price), effective the same day. The reduction of price was over and above the promotional offers for the company’s vehicle range.
The auto industry has been facing the worst slowdown in the last two decades and many car makers have lined up heaving discounts to lure buyers. Charles Frump, MD, Volvo Car India, is upbeat about the impact of the corporate tax rate cut for the auto business at large. “The Indian government recognized the need and the business slowdown, and I am very happy that they decided so decisively, and I think it’s going to have a big impact on our business. We already see a change, a positivity that we haven’t seen in the past months, and quarters. The car business is an emotional business, and when that emotion changes you can feel it, and we are already feeling that. While we didn’t cut back from our marketing perspective at all during the downturn, so we do not plan to increase now that it is starting to get better.”
FMCG is the bedrock of Indian advertising, forming the stability factor. While the past couple of quarters haven’t shown very high growth for FMCG, de-growth hasn’t been very high either. The sector has seen relatively flat growth in this year so far, as Anupam Bokey, VP Marketing (CMO), FMCG Business of the RP-Sanjiv Goenka Group points out. “The last three quarters have been quite terrible, particularly for the FMCG industry. And the growth has been in low single digits, very different from the kind of growth FMCG has seen in the past. With the corporate tax cut, there will be bandwidth for organisations to reinvest in brands and thus kick start the consumption cycle.”
What remains interesting to see is whether companies will look to use this tax cut to reduce costs or for brand building. “If tax is saved, profits go up. If profits go up, it depends on what a particular company does with those profits. Brand savvy companies will invest in the consumer, and that investment could include short-term benefits as promos and incentives, or hopefully long-term investments in brand building. So, this kind of an initiative helps separate the men from the boys, with regards to a company’s perspective on brand building versus cost saving,” notes Ajay Kakar, Chief Marketing Officer, Aditya Birla Capital.
CONSUMPTION BOOST AHEAD OF FESTIVE SEASON
Reduction in the effective tax rate provides an additional earnings cushion to demand-challenged industries and has come ahead of the festival season. “In our view, the additional cushion will provide an opportunity for companies to provide better terms of trade to channel partners and customers and could lead to recovery in demand environment. We expect the fight to expand market share will ensure benefits are passed on in industries that are not oligopolistic,” says Karan Taurani, Vice President - (Research Analyst), Elara Capital in his report on Corporate Tax Cut.
Given that this is the festive quarter, there is positive anticipation from across sectors that the tax cut will give the season that much needed lift in consumer sentiment. Anupriya Acharya, CEO, Publicis Media India, observes, “First of course, we can see that it has already boosted the sentiment. If we look at the equity market and how well it has done in the last few days, you will note that stocks of a lot of companies have gone up.
CEO APAC and Chairman India, Dentsu Aegis Network
“Almost 40% of the entire year’s advertising budget traditionally is spent between Ganapati and New Year’s. I expect that this year the figure will be Rs 28,000 crore. Last year it was around Rs 25,000 crore. So, it will be a double digit increase because of that, if you just look at the festive season.”
CEO, IPG Mediabrands
“Consumer sentiment will definitely turn.
The timing is perfect. Whether it will be a dramatic increase or not – the numbers no one can tell – but definitely there’ll be a big fillip. The only downside is that Diwali is so close, and so the impact will only be limited.”
Secondly it will also pan out in the way how it impacts each sector. So whether the sector is going to take it their bottom line in the short run because they want to ensure that they are performing well and play to the equity markets or whether they are going to pass it on to the consumer and hence in turn drive further demand and grow consumption, that is something we will see in the next few months.” She adds that whatever each sector or company decides, it will inevitably result in a positive outcome.
The uplift and overall impact will be difficult to estimate at this point, but with Diwali being all about sentiment, brands and media planners are optimistic that the tax cut will see a change in the current economic climate. For example, Shashi Sinha, CEO, IPG Mediabrands tells us of a client that deals in two-wheeler vehicles, which chose to increase its ads post the tax cut. “Consumer sentiment will definitely turn. The timing is perfect. Whether it will be a dramatic increase or not – the numbers no one can tell – but definitely there’ll be a big fillip. The only downside is that Diwali is so close, so the impact will only be limited. Nevertheless it’ll be better than what it was,” Sinha points out.
Sandeep Sharma, President – RK Swamy Media Group, is optimistic about how the industry will shape up this festive season even while the mood and consumer sentiment has been at an all-time low. “The industry has been cautiously optimistic going into the festive season. However, you may remember that even in this gloom, MG Hector and Kia launched their new SUVs and hit record numbers. Flipkart has launched a mega campaign with
The role of Ads in the festive planning cycle
Ads play an important role in introducing consumers to brands, providing them with further information about the brands and nudging them to make a purchase during the festive season.
literally every major celebrity. October should kick start the ad investments with major festivals in this month. We expect pre and post Diwali to be a very busy season for advertising,” insists Sharma.
“The festive season becomes very important particularly this year. Almost 40% of the entire year’s advertising traditionally is spent between Ganapati and New Year’s, and that’s roughly where the festive season starts is different in different parts of the country. I expect that this year the figure will be Rs 28,000 crore. Last year it was around Rs 25,000 crore. So, it will be a double digit increase because of that, if you just look at the festive season,” adds Ashish Bhasin, CEO APAC and Chairman India, Dentsu Aegis Network.
The rate cut has put a lot of positive sentiments in the market, which was evident from the way stock markets have reacted. While there will be a spurt in advertising and marketing spends, it is unclear if any impact will be seen in terms of consumption growth. Mohit Joshi, Managing Director, Havas Media Group, says, “Last year advertising spends during the festive season were upwards of Rs 25,000 crore. I expect it to grow by 15% this festive season.” He adds that the auto sectors should benefit more from this tax cut.
“With more money now available to corporates, there may be increased allocations to advertising, marketing and promotion budgets,” adds Amod Khare, Tax Leader, Media & Entertainment, EY India.
BRIGHTER DAYS AHEAD?
The issue with the current tax cut has been that while it does help companies improve their profitability because it reduces their effective tax rate, it does nothing to trigger and enhance demand on the consumer side. How will companies revive a subdued consumer demand? Pradeep Dwivedi, Founder & CEO, Divitiae IN, says a lot depends on how brands use this tax cut. “Some brands have come out and said very clearly that they will use the money to promote aggressively. Some of the brands have not been so vocal about it. The only hope is that every brand sees this as a watershed opportunity to retrigger the economic cycle by increasing demand,” Dwivedi remarks.
Markets have thus far responded favourably, and now it is for the companies to take a decision. While it is too early to speculate just how big a boon this will be, Vikram Sakhuja, Partner & Group CEO, Madison Media & OOH, explains, “What’s going to be interesting is that there are some companies which are going to get a full benefit of the 10% plus, and there will be others that will not be affected as much. One would hope that companies take in the windfall that they’re getting and invest back into marketing, and I think most people will.”
The reduction of corporate tax rate seems to be a cogent move to boost the investment demand in India, but many experts believe that the move may not reap fruits in the short term. “The ripple effects of this move may be seen in the medium term, over a year. The government has put the Indian companies on a better footing in the world market to compete against their peers. It is now upon India Inc. to step up and retaliate with price cuts, increased spends and new investments,” states Himanshu Parekh – Partner at KPMG.
With Maruti passing over the benefit of corporate tax rate cuts to its customers by slashing price of the cars, the signal from the auto industry is also clear. The positive effect may therefore specifically be seen in sectors like auto and FMCG. On the ad spends front, Jehil Thakkar, Partner, Deloitte India states, “Advertising is really dependent on B2C spends, so once there is revival in confidence, we will see some amount of turnaround in sentiment, something that I expect will happen towards the end of the year.”
Though it could be difficult to quantify the increase in the advertising spends attributable to the cut, things are definitely looking less gloomy given the opportune period for increased consumption, a good expected monsoon and under-utilised ad budgets. “We could expect sectors such as Auto, Real Estate, Jewellery, Fashion & Apparel, E-commerce and Consumer Durables to become more aggravated in terms of advertising this festive season. Also, with the viewership stabilising post-NTO and increase in the ad volumes in anticipation of the festive season, we could see improvement in the ad rates for television,” state Abneesh Roy, Executive Vice President and Prateek Barsagade, Research Analyst Edelweiss Financial Services.