About 60% of India’s palm oil demand is met through imports, of which Indonesia and Malaysia account for a little more than three-fourths of total imports. Palm and its derivatives account for over 20% of the input cost basket of the consumer companies and the margin stress is likely to exacerbate further. “There will definitely be another round of price hikes. It is difficult to ascertain the exact percentage since prices of palm and other raw materials are highly volatile making it difficult to predict where they will stabilise,” said Mayank Shah, senior category head, Parle Products.
Last Friday, Indonesia banned the palm oil exports until further notice, a move that industry officials and analysts felt could make all major edible oils, including palm and sunflower oil, costlier. However, Bloomberg on Monday citing sources reported that Indonesia is likely to only halt exports of bulk and packaged refined, bleached and deodorised (RBD) palm olein.
‘Discretionary Spending may be Hit’
Exports of crude palm oil and RBD palm oil could be allowed.
Food companies and soap makers use crude palm oil and its derivative but not refined palm oil to manufacture their products.
Jefferies in a note said Indian consumer staples have been grappling with high inflation and volatility in input pricing which makes decision-making tough and the latest development would become a key worry for companies including Hindustan Unilever, Godrej Consumer, Britannia and Nestle.
While most listed consumer firms are yet to announce quarterly earnings performance, the impact of cost inflation has been visible in Nestle India’s first-quarter margin which contracted 330 bps during the quarter ended March. Within the personal care segment, prices of soaps have already increased 26% while shampoo and hair colour saw an 8-9% price revision since March 2021, according to a price tracker report by Bizom, a sales automation firm that transacts with 7.5 million retail stores.
“Commodities such as rice, spices and edible oil have seen their price tag increase anywhere between 18% and 37% while packaged food products including snacks, bread and cereals had 8-12% price hikes,” said Akshay D’Souza, chief of growth and insights at Mobisy Technologies, which owns Bizom.
Companies said high prices, especially in essentials such as edible oil, impact the overall household budget leading to calibrated consumption of non-essential products.
“Consumers tend to cut spending on discretionary products since edible oil is essential and cannot be replaced. So a single category can impact overall consumption in a situation where most of the products are getting pricier. We saw severe inflation since January and expect demand by June quarter to be subdued due to price hikes,” said Anil Chugh, president, consumer care business, Wipro Consumer Care and Lighting, which sells brands including Santoor and Safewash.
‘Full Picture to Emerge in Q1’
The prices of palm oil have risen 50% in the last 12 months and trebled over the past two years. According to CLSA, an 80% inflation in palm oil requires a 16% price hike to maintain absolute gross profit per unit for soaps while a 32% price hike is needed to maintain its gross margin for companies.
“While the full impact of the sharp increase in input costs due to prolonged Russia-Ukraine geopolitical tensions will be witnessed only in the first quarter of FY23 after companies have exhausted their lower-cost inventory of 3-4 months on average, we note fourth quarter of FY22 continued to see elevated input-cost inflation. This led to product price increases once again lagging inflation and pressuring gross product margins for the past 10 consecutive quarters,” said Nomura in an investor note.
Last week, ITC chairman and managing director Sanjiv Puri at the India Economic Conclave 2022 said inflation is not the only parameter that influences consumption growth. “Inflation is a challenge. But on account of the Russia-Ukraine conflict, there are rising prices of agri-commodities on one side, which is creating inflation, and on the other hand, is going to pump a lot more money into the rural economy. The crop is also good with higher realisations. Input costs have increased but the net is a positive,” said Puri.
Soaps, shampoo, chocolates and biscuits have a weightage of around 1.6% in the consumer price index, so every 10% hike in these products will translate into a 10 basis points increase in the index.