The price of palm oil has fallen by around 50% since its peak levels but still, the prices remain elevated in terms of pre-pandemic level.
Palm Oil is a key ingredient in the manufacturing for food processing industries as well as FMCG company that operates in the personal care segment as well.
Palm oil is the world's most widely used vegetable oil as it accounts for about 40% of the supply of the top four edible oils, and is used in the manufacture of many products including biscuits, margarine, laundry detergents, and chocolate.
In FY21, India imported 13.13 MT of edible oil, of which palm oil was 8.18 MT, the figure remains almost at a similar level in FY22 for Palm Oil.
Beneficiaries:
1) Food Space:
Wheat, sugar, and palm oil account for 40-60% of the total cost of raw materials involved in making biscuits, noodles, bread, and beverages, among others.
Two companies to keep on the radar:
o Nestle India
o Britannia
2) Personal Care Space:
Palm oil accounts for 20-25% of the raw material cost for companies in the personal care space.
Two companies to keep on the radar:
o Godrej Consumer Products Limited (GCPL)
o HUL (HUL owns personal care and Foods & refreshment business as well, the usage of palm oil is much higher compared to GCPL)
Near-Term Concerns:
Although Palm Oil which is one of the key ingredients has witnessed a fall in price, other key raw materials like wheat and sugar have increased by around 10%-15%.
Softening of raw material prices may not immediately benefit FMCG companies due to:
o Increased Ad-Spends due to festive seasons
o Lines up new innovative packs
o Discounts and promotional spending
Despite price hikes in the past, FMCG companies are recording a gap between the cost vs. the increased price hikes. The margins are expected to be impacted at least till Q3FY23.
What Should Investors Do?
FMCG Industry is an industry with long-term earnings visibility and companies with a significant presence in the industry get an edge over the smaller players as they enjoy higher margins, better market share, and long-term earnings growth visibility as well. Hence investors looking for some allocation in the FMCG sector should keep discussed stock on their radar. One should follow due diligence before making investment decisions.
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