Before we get to today's story, a quick recap on all the things we covered this week. On Monday we spoke about airlines and the Metaverse, next we discussed NBFCs and new credit card regulations. On Wednesday we talked about scotch whiskey, then we discussed India's labour participation rates and finally we saw how Indian steelmakers have a foreign coke addiction
And with that out of the way let's get to today's story shall we?
The Story
FMCG companies are in a bit of a rut. The stock market index made up solely of FMCG companies has barely moved an inch (1%) in the past couple of months. And even the weight of FMCG stocks in the benchmark Nifty 50 index is down to a decadal low of just 9.9%.
Everyone’s staying away from the pack. But, why?
Well for starters, FMCG stocks were already expensive. It’s to say that investors were paying top money for these stocks even when growth and profits weren’t exactly stellar. And while expensive stocks can be eyecatching in a bull market, the added focus can be crippling when markets don’t work like they use to. More importantly, as the economy goes through a rough patch, people (both consumers and stock market investors) begin evaluating whether the price is worth it. According to retail research platform Bizom, average monthly sales per kirana store declined 10% in March (compared to the same figures in February). So it’s likely that people are cutting back on consumption. This includes biscuits, soaps, shampoos and chocolates — products that FMCG companies usually dabble with.
This in turn translates to lower revenue and profit expectations — which could perhaps explain why FMCG stocks aren’t doing all that well.
But why are people cutting down on consumption? What changed?
Well, ask yourself this — “Have you thought about pruning your spending of late?” If you have, then you know that inflation is rampant everywhere you see. Wheat, crude oil, packaging products — everything is more expensive. And while FMCG companies can pass some of this cost to consumers, doing so obviously eats into demand. And if demand starts tapering, their sales could plummet even further. It’s a vicious cycle.
And to make matters worse, they also have to contend with rising palm oil prices. Yes, palm oil. You probably don’t think of it much, but it’s an essential ingredient in most FMCG products. Your favourite Oreo cookies, that bar of dove soap, even Nutella — everything has palm oil in it. And for FMCG behemoths like HUL and Britannia, palm oil and its derivatives make up at least 15% of their costs. For Godrej Consumer Products, it’s even higher at 20%.
Now here’s the thing. Over 70% of India’s palm oil imports come from Indonesia. And unfortunately, they’ve temporarily banned exports of this key commodity. They’re trying to protect their own interests making sure they’ve enough of it to meet domestic needs and they’ve cut exports almost entirely.
And you can see why this is a problem for FMCG companies. However, one company has been particularly immune to all these developments — Adani Wilmar. In just a couple of months since its IPO, Adani Wilmar has set the stage on fire — its stock is up over 125% during the same period. And the company is now worth close to ₹1 lakh crores. It’s in the big leagues now.
But what explains this anomaly? How come they’re so insulated from these external shocks?
For starters, most people think of Adani Wilmar as an FMCG conglomerate since they sell noodles, pasta, biscuits, and even soaps. But they have an explicit focus on edible oil. Ever heard of the brand name “Fortune?” Adani Wilmar sells the product and it contributes close to 80% of their revenues. In fact, they’re the largest edible oil manufacturer in India with a market share of close to 19%!
So they only have to worry about inflation that affects the edible oil business. Everything else doesn’t affect them as much.
And the thing about edible oil? Demand is extremely sticky here. People need to cook and eat something. And they need edible oil. Sure, it’s a known fact that when prices rise too much, people shift to unbranded products. But if you looked carefully, you’d see that the price rises have benefited Adani Wilmar as opposed to hurting them.
The war in Ukraine has affected sunflower and soybean production. The Indonesian ban has scuttled palm oil supplies and the Malaysian tax is also hurting business. But the likes of Adani Wilmar have already stocked up on raw material. And the price rise will only begin to affect them in a few weeks/months from now. Until then, they can keep pushing the price of edible oil higher, knowing fully well that their input cost hasn’t increased as much.
They also have another ace up their sleeve — the association with the Wilmar Group. Wilmar is actually one of the largest palm oil producers in the world. And they own a 44% stake in this FMCG company. In fact, close to 30% of the company’s imported raw materials came from the Wilmar Group in FY21. And since they’re so heavily involved in edible oil production, Adani Wilmar hasn’t felt the shock as much.
They can even wiggle their way into the FMCG value chain — Supply edible oil to their peers. They are probably one of the few companies who have this degree of control in the edible oil supply chain right now.
So yeah, for the moment, Adani Wilmar finds itself in a sweet spot compared to its FMCG peers. But we will have to wait and see if elevated prices will eventually scuttle matters for the company.
Until then…
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