Will edible oil stocks run out of steam?

Palm oil prices have been volatile thus far in 2022. 

After hitting a high of 8,200 Malaysian Ringgits per tonne within a week of the Ukraine-Russia war, they slipped to a low of 3,600 Malaysian Ringgits in July, only to bounce back by around 14% in August.

Against the backdrop, companies like Adani Wilmar and Patanjali Foods hiked prices by around 5-7% to cope with the rising palm oil prices.

As global palm oil prices corrected, the Indian government directed related companies to cut edible oil prices about 40 rupees per litre over the past few weeks to alleviate inflationary pressures.

Nirav Karkera, Head - Research, Fisdom says price changes take time to reflect and earning contraction has been seen for Adani Wilmar and Patanjali Foods. Free Cash Flows (FCF) may be impacted. 

Adani Wilmar’s edible oil EBITDA margin weakened by 200 rupees per tonne during the June 2022 quarter on the back of inflation, and down-trading by consumers. 

Patanjali Foods’ revenue from oils and vanaspati segment grew a meagre 7% over the March quarter. 

However, easing prices, along with the festive season ahead are silver linings and should support volume growth in the coming quarters, analysts said. 

Against this backdrop, Edelweiss Securities suggests ‘Holding’ Adani Wilmar for a target of Rs 743 per share. 

Nirvi Ashar, Fundamental Analyst, Religare Broking says companies avoiding steep price cuts to maintain margins. Margins set to improve over the medium term, she says adding that one should accumulate stocks from long-term perspective.

Overall, healthy demand outlook, due to festive season and expected improvement in rural sentiment, is keeping analysts bullish on the sector, at least for now.

On Friday, investors will eye the domestic retail inflation data for July. Besides, global cues, and other stock specific action will also sway the indices.