Consumer - Event Update - Indonesia palmoil export ban can exacerbate margin concerns

Mr. Amnish Aggarwal, Director - Research at Prabhudas Lilladher.

Quick Pointers:

- Indonesia's ban of palm oil exports can push up edible oil prices

- Expect increased margin pressure for companies in food processing and QSR

Indonesia, the largest producer/exporter of palm oil, has announced a ban of palm oil exports. The ban comes as another blow after the surge in oils due to the Ukraine-Russia war. Given that plamoil is 60% of oil imports and Indonesia being the second largest seller, it will push up domestic prices in coming months.

Palm oil is a key ingredient in major food processing industries, QSRs etc. will impact costs and margins in several consumer companies. FMCG staples majors such as Britannia, Hindustan Unilever, Nestle India and ITC would be amongst the key companies affected directly as a result of the ban and higher prices. We believe the impact would be seen most in categories such as biscuits, noodles, cakes, potato chips, frozen desserts etc. QSR's like Westlife Development and Burger King can also feel the pinch given edible oil usage to cook/fry their patties/fries.

We believe increase in prices of palmoil will further impact the margins in 1QFY23. We expect margins to bottom out in 1HFY23 given inflation across inputs. We don't rule out further cut in margins in 1H23. We expect weak to sideways movement for select consumer stocks in the near term.

Palmoil accounts for ~60-65% of India's edible oil imports

India would be amongst the worst affected countries as it is the world's largest palm oil importers which depends heavily on Indonesia & Malaysia. India, the world's leading vegetable oil buyer, imported 14-15 MT, of which palm oil stood at 8-9 MT. Palm oil is the relatively cheaper oil amongst the other edible oils. This move is expected to cause a further price increase in other edible oils such as soyabean oil, sunflower oil etc.

Expect further price hike / grammage reduction

Inflation in the RM basket has been a long standing problem for the sector and companies have resorted to price/grammage hikes to partially absorb the inflationary impact. This has resulted in margin pressure starting from 3Q22 onwards which is expected to continue further. This new ban would likely keep prices firm to bullish in the near term until such a time the ban gets reversed and global commodity prices become stable.

Source : Equity Bulls

Keywords

PrabhudasLilladher Consumer EventUpdate ExportBan Indonesia Palmoil