Despite sluggish domestic demand, PLI builds FMCG appetite for expansion | Business Standard News

Clipped from: https://www.business-standard.com/article/companies/despite-sluggish-domestic-demand-pli-builds-fmcg-appetite-for-expansion-121121701321_1.html

Amul has accelerated its expansion plans in ice creams and other ready-to-eat products

food processingCompanies such as Parle Products and Amul have also decided to go ahead with their expansion plans after they were granted incentives under the scheme

After the government announced a production-linked incentive (PLI) scheme extending incentives worth Rs 10,900 crore for the food processing sector on March 31, Dabur India was the first company to announce in June that it had set up a Rs 550-crore factory to manufacture food products, Ayurvedic medicines and health supplements in the SMART Industrial Park near Indore.

The company had also said then that the first phase of construction of this new facility — which has been planned under the Mega Projects Scheme of the Madhya Pradesh government as well as the Centre’s PLI scheme — is scheduled for completion by the end of 2021-22.

Dabur India is not alone in expanding its manufacturing facilities after the PLI scheme was announced. Companies such as Parle Products and Amul have also decided to go ahead with their expansion plans after they were granted incentives under the scheme.

Under the PLI scheme for food processing companies, the government has approved 60 investment applications, which included those by companies such as Britannia Industries, Nestle India, Hindustan Unilever and ITC. “Companies have advanced their expansion plans to get the benefits of the PLI scheme. Many companies have invested in backward integration projects or even diversification to cater to rising global demand for processed fruits and vegetables,” said Achal Chawla, partner at EY India.

Amul has accelerated its expansion plans in ice creams and other ready-to-eat products. It also plans to invest in expanding its mozzarella cheese and frozen vegetables facilities.

“Initially, Parle Products did not plan to expand aggressively owing to the subdued domestic demand scenario but changed its mind after the PLI scheme was announced,” Mayank Shah, category head at Parle Products, told Business Standard.

“This will increase our competitiveness in export markets. We already have manufacturing facilities outside the country. The PLI scheme will now help us manufacture here and export,” he said, adding, “When you increase your scale of production, there is more competition, and the benefit will also accrue to consumers in terms of better-quality products made available at better prices.”

Mohit Malhotra, CEO at Dabur India, said the PLI scheme has been crafted to promote domestic manufacturing and would lead to the creation of large-scale manufacturing capacity besides promoting job creation in a critical sector like food processing.

MTR Foods, which has received PLI approval under the fruit and vegetables category, also said that the incentive offered will accelerate a few of its expansion and modernisation plans.

“While expansion is always looked at once every three years on a modular basis, PLI will perhaps accelerate a few of our expansion and modernisation proposals,” Sanjay Sharma, chief executive officer, MTR Foods, told Business Standard. “Our innovation cycle churns out eight to 10 new products annually, and the PLI scheme could ensure that our consumers receive continuously improved, new products from the MTR stable.”

Edelweiss Securities said in its note on companies receiving approval for the PLI scheme that the programme will help create 250,000 jobs, boost exports and ensure availability of a wider range of value-added products for consumers.

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Over the long term, PLI-approved companies are expected to see better profitability as the categories under which they have received approvals are margin-accretive — they are all value-added products such as ready-to-cook, ready-to-eat, processed fruit and vegetables, and milk products such as cheese.

Parle Products expects margins to improve over four to five years and exports to go up by 20-25 per cent under the scheme. Amul expects its margins to improve 10-12 per cent in the categories in which it has received approval from the government for the PLI scheme from this year onwards.

Chawla also said that the scheme is different from older import substitution-export promotion schemes as the minimum or committed investment size was low, and no other scheme provides for incentive on branding and marketing expenses to be incurred outside India.

While comparing the PLI scheme to previously announced incentives by the government, R S Sodhi, managing director, Gujarat Cooperative Milk Marketing Federation (Amul), said that earlier schemes always gave incentives to companies to expand. “This is the first time the government has announced a scheme that is production-linked and companies can avail of the incentive only on incremental sales,” he added.

The big question, of course, is whether the scheme will create the requisite surge in exports. In selecting applicants, the PLI scheme puts a 33 per cent weight on past exports.

“The scheme is also incentivising promotion of Indian brands across the globe by putting an incentive on branding and marketing expenses abroad. This will ensure the opening up of new markets for Indian brands,” Chawla said.

PLI-approved companies agree. “I think Indian companies are not exporting enough. We have an opportunity now and exports will only grow from here,” Shah added.

In developed markets, he pointed out, retail players are largely organised so they demand higher margins, which Indian food companies find difficult to meet because of the low volumes they export. “PLI gives us the opportunity to plough back profits and increase in-store promotions as well,” Shah said. Parle will also export to newer geographies, but it did not disclose details.

Chawla also said that there was no issue in terms of demand for food items exported from India. “Businesses were already looking to export and I clearly see the global market opening up for them based on past numbers, and they will continue to sustain on their own even after the incentives given come to an end,” he said.

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