Edible oil duty hike doesn’t spoil investor appetite for packaged food stocks
The government’s decision to raise import duty on edible oils is expected to benefit farmers if domestic prices move up and as a result farmers get a higher price for oilseeds. Indeed, a Reuters report says Indian soyoil and crude palm oil futures rose by 4% on Monday as the increase was much higher than expected.
The import duty on crude palm oil was doubled to 30%. While this may be good news for farmers and domestic edible oil refiners, it does raise the question of a cost push for packaged food companies and what impact that may have on their margins.
Companies such as Britannia Industries Ltd and Nestle India Ltd, and even the foods division of ITC Ltd, count edible oil as a key input, alongside others such as wheat flour, sugar and milk products. Britannia’s FY16 annual reports shows oils and fats accounting for around 15% of raw material consumed, while Nestle’s 2016 annual report shows it at 9%.
While oil prices may increase, companies usually take an overall view on raw material costs before making changes to pricing. Wholesale price data collected by the government shows that wheat flour prices have declined slightly from a year ago, but the price of sugar and milk has been increasing and if edible oil prices increase post-duty hike, it points to a cost push. Companies are likely to increase prices to the extent the market can absorb it.
An improving consumer demand scenario may give them confidence on increasing prices without affecting sales. The September quarter indicated a revival in consumer demand in urban and to a lesser extent in rural areas. Consumer companies’ profitability too improved in the September quarter, partly due to accruing benefits from the goods and services tax roll-out.
Since investors will focus more on whether the sales growth story can pick up pace, an increase in costs may not be a worry at this point. That could explain why shares of Britannia and Nestle shares did not react to news of the sharp hike in import duty.