What will be the immediate impact of government measures on the removal of import duties on sunflower and soybean oil?
The immediate impact of the duty exemption will be a reduction in prices. The agrcess plus the combined customs duty is approximately 5.5%. We expect if not the full 5.5% certainly 70-80% of that should start to be reflected in prices and I expect to see a reduction of between Rs 3 and Rs 5 in the cost at which it is available to the customer.
And as a percentage of total sales, how much will that affect you?
In the edible oil industry, it’s more of a catch-all, and to that extent it’s beneficial to consumers. It is also good for big companies and organized processors, because the conditionality is that unless you have a processing capacity with an import-export code, the only basis is that the tariff quota will be released , which is favorable to the industry. More organized actors will be able to access the quota and this is certainly very positive for consumers because they will obtain oil at a lower cost.
Now that the duty reduction has been implemented, would you prioritize it and pass it on to customers or since your margins are under pressure, are you likely to absorb it?
Normally, it is not about absorbing losses or passing them on. Most companies would tend to pass it on to consumers because they have no choice. The margins are very thin. Competitive market forces will determine prices and I expect most companies will be able to pass on the full benefits to consumers and possibly more. If prices were to fall further, this would have a cascading effect of better prices for consumers.
The rupee also depreciated. On the one hand, profits would come but on the other hand, if the rupee depreciated, would that negate the benefit?
That’s right. Most importers are large companies. Whenever we enter into a contract, we immediately hedge our dollar exposure and the dollar exposure is not huge in terms of rupee depreciation. So I expect it to be very marginal, maybe around 0.25%, if at all, it will be dollar exposure in the whole thing. So, I don’t think it will have a big impact, but yes, if the dollar suddenly depreciates and the forex exposure is uncovered, there could be a challenge on pricing.
“ Back to recommendation stories
Make sure Indonesian palm oil prices stabilize, as it is a very large part of your imports. Is there a lot of volatility there?
Indonesia has imposed a quota system and exports continue to be allowed. Against the quota you need to seek permission from the government. They basically do this to control consumer prices. I expect the situation to improve because storage capacity in Indonesia is under pressure. There is massive pressure from refiners and farmers because almost 60% of palm oil production in Indonesia is owned by smaller farmers and there is great pressure to allow exports and i so expect palm oil to stabilize. I expect that this measure that the government has taken to reduce customs duties will have a positive impact on the whole process of price discovery and net-net this is a beneficial step and it is to be hoped and s Expect the overall Edible Oil Complex chart itself to remain more stable now because we’ve seen the peak and hope the prices ahead should stabilize.
Can I safely say that the worst is behind us and that margin pressures will gradually ease and things will only get better?
I would not go that far to say that the worst is behind us, because there are many uncertainties on the horizon, including the continuation of the war in Russia and Ukraine. We are entering peak palm production season in Malaysia and Indonesia and to that extent the palm oil scene looks more comfortable. Soybean oil and sunflower oil are in uncertain territory, but net-net the way prices have climbed we need to watch. I wouldn’t say the worst is behind us yet.
With , the focus was on the oil business, but now you are also considering merging some of your other businesses. What’s the update in terms of inflationary pressures, I mean in your other product lines?
There is clear pressure on the biscuit sector. The price spike we’ve seen for wheat flour and we’re seeing for palm oil, edible oil and sugar has been the most stable of the three. Clearly there is massive pressure on some companies and we are doing our best because ultimately the market is the final arbiter as to who they want to buy from and companies are looking at price cuts costs, companies are looking to bundle some planning around the weight of the packaging which is given to the consumer and similarly efforts are being made to reduce the cost without affecting the consumer prices too much.
So to that extent, I admit there’s some pressure, but we’re working around that to make sure we stay profitable and do better so that there’s some efficiency. We are working a lot on logistics and on setting up factories closer to the place of consumption. But the industry is under pressure in some segments.
What’s the good news for a company like Ruchi Soya?
Anything pro-consumer is always positive. Edible oil continues to be the largest segment and that’s very positive for us. We believe that the market, the demand is quite stable and the supply is improving at the moment.
Our food business is extremely positive and our palm oil plantation is also benefiting from higher prices. Net-net is a good situation for Ruchi Soya in terms of progress, both in terms of profitability and scale. I don’t expect a significant setback due to all these issues.