HUL To Nestle: FMCG Firms Could See Margin Pressure As Palm Oil Prices Rise

The recent spike in palm oil prices has put a strain on the fast-moving consumer goods sector, which relies heavily on this commodity as a key raw material.

Over the past month, palm oil prices have surged by 12%, marking a 46% increase year-on-year. This sharp price rise has had a ripple effect across FMCG companies, raising concerns over the impact on profitability.

Palm oil is a versatile ingredient used in numerous FMCG products, including chocolates, biscuits, cakes, soaps, shampoos, and cleaning products. In certain items, like instant noodles, palm oil can make up to 20% of the product’s weight. As prices increase, companies are faced with difficult decisions on pricing, with many opting not to fully pass these costs onto consumers to avoid affects on demand.

The price increase has already started to impact margins for FMCG leaders like Hindustan Unilever Ltd. and Nestle India Ltd. In the second quarter, HUL reported a 150 basis point drop in gross margins, while Nestle saw a 130 bps dip. While these companies are absorbing part of the cost increase, they face pressure to manage expenses without drastically impacting consumer prices.

HUL is one of the largest end-users of palm oil derivatives in India, sourcing its palm oil from its wholly-owned subsidiary, Unilever Oleochemical Indonesia. Nestle sources 90% of its edible oil locally, Colgate relies on Indian suppliers, and Godrej Consumer Products Ltd. imports palm oil from various geographies, with an exposure of Rs 1,148 crore to palm oil derivatives in fiscal 2024. These sourcing strategies highlight the heavy reliance on palm oil and the challenges companies face amid rising costs.

In response to rising prices, many FMCG companies are exploring alternative ingredients to palm oil and committing to sustainable sourcing practices. Dabur India Ltd., Jyothy Labs Ltd., and Marico Ltd. are closely monitoring price trends to evaluate the impact on their operations. While the shift toward alternatives and sustainable sourcing is still in its early stages, it signals a proactive approach to mitigate future risks associated with palm oil price volatility.

According to Kaustubh Pawaskar, deputy VP, research at Sharekhan by BNP Paribas, FMCG companies like HUL and Godrej Consumer Products are likely to face pressure on margins due to the sharp rise in palm oil prices. These companies typically hold two-three months of low-cost inventory, which means the full impact of higher raw material costs will be felt in the second half of the fiscal.

While margins are expected to remain under pressure in the near term, Pawaskar notes that companies will mitigate this by taking gradual price hikes in their product portfolio—a strategy that many have already signaled. He forecasts a high single digit revenue growth and low single digit bottom-line growth for the FMCG sector in the second half of the financial year.

Preeyam Toliya, senior research analyst-FMCG, Axis Securities, emphasised that FMCG majors like Britannia Industries Ltd. and HUL will be among the most affected by the surge in palm oil prices, as this raw material accounts for 15-20% of raw material costs for HUL and higher for Britannia and Nestle.

This rise is expected to exert significant pressure on margins, especially as price hikes are likely to offset costs, but without driving volume growth, keeping fiscal 2025 margins under strain. However, for snacking companies like Bikaji Foods and Gopal Snacks, which are experiencing volume growth and expanding their market reach, the margin impact from rising palm oil costs may be partially alleviated by increased sales volumes.