How Edible Oil Can Prove To Be Strength As Well As Weakness For Adani Wilmar

“It was the best of times, it was the worst of times…”

Over 160 years after Charles Dickens wrote those famous lines in A Tale of Two Cities describing the period of the French Revolution, the same rings true for the Indian economy. Right when the country was learning how to cope with the economic aftermath of the Covid-19 pandemic, it is now faced with rising inflation that has led to household budgets going awry. A war in Europe threatening global food inflation has not spared India either.

Even against this gloomy backdrop, the investors of Adani Wilmar have had a lot to cheer about. Since its initial public offering (IPO) in January this year, the company’s stock has extended its total returns to over 200 per cent. The company opened at Rs 230 and was trading at Rs 753.60 on Monday.

An equal joint venture between Adani Enterprises and Wilmar International, Adani Wilmar is among the largest FMCG companies in India. Its product portfolio spans mainly across three categories—edible oil, packaged food and FMCG, and industry essentials—with further subcategories in each of these segments. It is a leader in the edible oil segment and commands the highest market share of about 18.3 per cent through Fortune and other brands. 

Market watchers feel that much of its stock performance is due to the edible oil price expectations that are expected to remain elevated for some time now due to several larger geopolitical issues.

Decoding Results

The company’s consolidated net profit saw a 26 per cent decline to Rs 234.29 crore for the quarter ended March 2022 mainly due to higher tax expenses. Its net profit for the same period a year ago was Rs 315 crore. For the full financial year 2021-22, the company's net profit rose to Rs 803.73 crore from Rs 728.51 crore in the previous fiscal. Its total income increased to Rs 15,022.94 crore during the January-March period from Rs 10,698.51 crore in the corresponding period of 2020-21.

"We have delivered steady growth in spite of the challenging macro environment. The food and FMCG segment registered double-digit growth. We have continued to improve our market share across edible oil and food categories," Angshu Mallick, managing director, and chief executive officer of the company, said in a post-result investor call. 

In an interview with Outlook Business, the CEO says that the company has achieved 4.8 million metric tonne volume growth this year. "In oil, we would like to continue to grow at 6-8 per cent volume growth. In food and staples, we are targeting volume growth at 30-plus per cent and industry essentials, at 5-6 per cent. This is our thought process going forward," he says.

However, going ahead, rising input cost prices and larger geopolitical tensions are expected to put pressure on the margins for FMCG companies, especially with respect to palm oil which is one of the key inputs for several FMCG products. 

To add to the mess, Indonesia, the biggest exporter of edible oils globally, recently banned the export of certain edible oils due to a dire shortage and soaring prices. It later widened the scope of the export ban to include crude palm oil. The ban is now applicable to used cooking oil, RBD palm oil, and crude palm oil. This would heighten the price volatility that the commodity is seeing and could worsen the food inflation being witnessed globally.

"The peak of edible oil (inflation) is already gone. The Indonesia problem surprised all of us. A country, that exports 65 per cent of its crude palm oil, cannot ban exports... But it is a question of a week before they withdraw and once they withdraw, the prices are likely to come down further," says Mallick. 

Explaining the impact that the prevailing global conditions could have on Adani Wilmar’s performance, Avinnash Gorakssakar, head of research at Profitmart Securities, says, “Although Adani Wilmar has some palm oil cultivation under it, it is not sufficient to take care of all its needs. Whether the ban is in place for three or six months, they (Adani Wilmar) operate in a very high-volume, low-margin arrangement. Their offsetting margin is not more than 6-7 per cent. They might have to wait for one or two months to increase prices because the price of a product does not increase immediately if raw material prices go up. That is something that would be a near-term challenge.”

Blockbuster IPO

The company’s revenue from edible oil for the quarter ended March 2022 was Rs 12,415.31 crore—up from Rs 12,118.11 crore reported in the quarter before. Its revenue from the segment saw a 40 per cent year-on-year jump from Rs 8,835.42 crore in March 2021. The Economic Survey 2021-22 had pegged a high annual growth rate of 3.4 per cent for vegetable oil imports till 2030. Some reports peg India’s edible oil market to grow from around $21.5 billion in 2019 to $35.2 billion by 2025 largely because of increasing disposable income and rising consumer awareness about healthy lifestyle.

“The IPO price in January 2022, post the launch, was Rs 258 and in April, it touched Rs 800, which is a rise of almost four times. It is largely due to sharp speculation activity by investors on expected oil price rally in future,” says Gorakssakar.
Palm oil, the most consumed edible oil globally, has seen a record 15 per cent rise in prices this year. Its counterpart, soybean oil, has seen a price rise of close to 12 per cent, resulting in an increase in food inflation across the world to almost all-time highs.

In India, government data shows that retail prices grew by 6.95 per cent in March from 6.07 per cent in February mainly on account of costlier food items. The inflation in the food basket was 7.68 per cent in March—up from 5.85 per cent in the preceding month—while oils and fats recorded an inflation of 5.3 per cent.

The company says that because of the Russia-Ukraine war, the supply of sunflower oil has declined by 50 per cent and India is now importing sunflower oil from source nations like Turkey, Russia and Argentina. In the post-result investor call, the company said a broad-based economic recovery would happen not before FY23 as the pandemic is gradually entering an endemic stage. It also said that it is expecting a normal monsoon and that the risks are fast shifting from the pandemic to elevated input prices, geopolitics, and Fed rate hikes.