Excise duty cuts - what happens when they reverse?

I looked at Godfrey Philips numbers in a bit more detail, considering I have mentioned it a few times now. The profits of the company almost doubled yoy in 1Q, which is very unusual. I thought there might have been some dealer inventory movements, and only after looking at 2Q will a clearer picture emerge.

In 1Q10 (June qtr), there is an excise duty reduction of close to 16 crore. Considering PBT is 82cr, this is almost a 20% boost to profits. Now this is a non-recurring item. My guess is that company had already paid excise duty on some goods on which it was able to claim the benefit when government reduced excise duties some time back - I might be wrong here.

So one can knock off 20% of 1Q earnings. Also, like other Indian companies, 1Q has higher "other income" as (fixed maturity plans) FMP's mature. If we exclude both of these, 1Q EPS is higher by 25% yoy. Full year EPS should be somewhere between Rs 120-130 excluding the excise tax benefit - Rs 140-150 including it.

The relevant question is - what happens when government again increases excise taxes? Like a lot of other Indian companies, GP hasn't passed on excise duty cuts to consumers, thus capturing incremental margins. Would companies be able to increase prices to offset any excise duty increase by govt to retain 1Q profitability? I doubt that they can do that in one quarter - such price increases will be spread out over a longer term. This is a big risk for some Indian companies. Surprisingly, no one is talking about this. Something to keep an eye on.

Disclosure: Own GP. Positions might change at any time.