Indonesia Palm Oil Export Ban To Squeeze HUL To ITC Even More: Analysts

Indonesia's decision to ban palm oil exports will increase margin pressure for India's top consumer goods makers, according to analysts.

India, the world's largest palm oil importer, depends heavily on Indonesia and Malaysia for its supply. One of the cheapest vegetable oils, the commodity makes up 60% of India's oil imports because of its use as a key ingredient in products such as bread, biscuit, chocolates, Nutella, soaps and cosmetics.

Indonesia, the world's top producer of the commodity, banned palm oil exports to make it affordable and increase availability domestically. The impact on India is likely to be the opposite.

The ban is expected to cause the prices of soyabean to sunflower oils to rise, according to Prabhudas Lilladher. And higher prices of palm oil will further impact the margins of companies in the first quarter of FY23 ending June.

"We expect margins to bottom out in the first half of the fiscal given inflation across inputs," Prabhudas Lilladher said in a report. "We don’t rule out further cut in margins. We expect weak to sideways movement for select consumer stocks in the near term."

Morgan Stanley concurs. "This changing dynamic of palm oil availability could result in a surge in other edible oil prices, implying overall downside risks to margins in an already high inflationary environment," it said. Palm oil prices had already shot up 29% year-to-date, after surging 34% in 2021.

Prabhudas Lilladher said Britannia Industries Ltd., Hindustan Unilever Ltd., Nestle India Ltd. and ITC Ltd. would be among 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."

Quick service restaurants such as Westlife Development Ltd., the operator of McDonald's in western and southern India; and Restaurant Brands Asia Ltd., the operator of Burger King, "can also feel the pinch given edible oil usage to cook their patties and fries".

While there are a lot of unknowns including the duration of the ban, palm oil input prices are likely to stay firm in the near term, with a potential risk to supplies as well, Jefferies said.

"The unorganised sector may face severe constraint but given the already tough demand environment, listed players face earning risks on demand and margins - Hindustan Unilever Ltd., Godrej Consumer Products Ltd. and packaged foods have the highest exposure."