Kaustubh Pawaskar on stocks that will benefit from fall in palm oil and crude prices

“Paint companies and companies like HUL, Godrej Consumer Products, Britannia and all of the FMCG companies where crude derivatives or packaging cost were high in the recent times would definitely gain in the quarters ahead,” says Kaustubh Pawaskar, DVP, Fundamental Research, Sharekhan

Palm oil prices are now at one-year low. Considering palm oil prices have been on a declining trend, what is the kind of gross margin expansion that one can see on a full year basis?
Talking about the gross margin expansion we believe that in Q2, there would still be pressure on the margins because normally companies hold inventory of six to eight weeks’ raw material with them. In the first half, we should expect margins to be lower on a year-on-year basis for companies like HUL, GCPL for whom palm oil prices are some of the key inputs.

We should expect a substantial improvement in the margins in the second half of the year because whatever correction in the palm oil prices or crude derivatives, the benefit would start flowing in from the second half of the year. Also, we need to monitor what pricing actions the companies would be taking up if prices stabilise from the current level. We have seen a slew of price increases which companies took in Q4 and Q1 to factor in the higher raw material prices. Now whether they will pass on this correction in input prices to the consumers, how much they will pass on to the consumers, is something important to watch out for.

Now the companies will definitely focus on improving their volume growth which has been a laggard for the past three to four quarters. So on raw material prices correcting, they might take some pricing action which will help them to gradually see volume recovery. We are anticipating gross margins to improve in the second half of the year and that will also help improve operating margins.

In light of that, can you just walk us through which players you see as the key beneficiaries of this? How do you see volume growth stacking up?

The key beneficiary of decline in the palm oil prices are the soap manufacturers like HUL and Godrej Consumer Products. Also, companies like Britannia and other food companies will gain from the decline in the palm oil prices.

In terms of falling crude prices, crude derivatives, paint companies are expected to gain because crude has fallen from levels of $120 to $86 now. There would definitely be a decline in the input prices for the paint companies and obviously they would see benefits coming in from the second half of the year.

So, paint companies and companies like HUL, Godrej Consumer Products, Britannia and all of the FMCG companies where crude derivatives or packaging cost were high in the recent times would definitely gain in the quarters ahead.

Volume growth is also expected to remain muted in Q2 because rural demand is yet to pick up, inflationary pressure is continuously putting pressure on the sales volume. Monsoons are good and post that, since the commodity prices are on a downtrend, we should expect some inflationary pressure to cool off in the quarters ahead. That should help sales volumes to pick up because in the urban markets, we have not seen any significant down trading or risk on the volumes. But there was definitely a slowdown in the rural market which we should expect to come back on track from quarter four of FY22.