Worst is not over for edible oil industry: Ruchi Soya CEO

“Most of the companies would tend to pass it on to the consumers because they have no choice. The margins are very razor thin. I am expecting that most of the companies will be able to pass on the entire benefit to the consumers and if prices were to drop further, it will have a cascading effect of better pricing for the consumers,” says Sanjeev Kumar Asthana, CEO, Ruchi Soya.

What will be the immediate impact of the government measures on removing import duty on sunflower and soya oil?
The immediate impact of the duty waiver will be a reduction in prices. The agri cess plus the custom duty combined is about 5.5%. We expect if not the entire 5.5%, certainly 70-80% of that should start reflecting back on prices and I am expecting 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 the total sales, how much will that affect you?
In the edible oil industry, it is more of a pass through and to that extent, it is beneficial for consumers. It is also good for large companies and organised processors because the conditionality is that unless we have a processing capacity which has got import-export code, the only basis is that the tariff quota will be released, which is pro-industry. More organised players will be able to access the quota and it is certainly very positive for consumers as they will get oil at cheaper cost.

Now that the duty cut has been implemented, would you prioritise it and pass it on to the customers or given that your margins are under pressure, are you likely to absorb it?
Normally, it is not about absorbing losses or passing on. Most of the companies would tend to pass it on to the consumers because they have no choice. The margins are very razor thin. It is the competitive market forces which are going to drive the pricing and I am expecting that most of the companies will be able to pass on the entire benefit to the consumers and perhaps even more. If prices were to drop further, it will have a cascading effect of better pricing for the consumers.

Rupee also has depreciated. On one hand, benefits would come in but on the other hand, if the rupee depreciates, that will nullify the advantage?
That is correct. Most of the importers are large corporates. Every time we do a contracting, we immediately hedge our dollar exposure and the dollar exposure is not enormous in terms of the rupee depreciation. So I expect that will be very marginal, maybe about 0.25% if at all, will be dollar exposure on the overall scheme of things. So, I do not think it will have a big impact but yes if the dollar were to depreciate suddenly and the forex exposure is uncovered, there might be a challenge on the pricing.

Have Indonesian palm oil prices stabilised because that is a very large component of your imports. There is a lot of volatility there?
Indonesia has imposed a quota system and exports continue to be allowed. Against the quota that you have to seek permission from the government. They are doing it basically to control consumer prices. I expect that situation should ease because the storage capacity in Indonesia is under stress. There is a massive pressure from the refiners and the farmers because nearly more than 60% of Indonesia palm oil production is dotted by smaller farmers and there is a big pressure to allow exports and so I expect palm oil will stabilise.

I expect this step which the government has taken to reduce the custom duty will have a positive impact on the entire process of the price discovery and net-net this is a beneficial step and one should hope and expect that the overall table of edible oil complex itself remains more stable now because we have seen the peak and hopefully over the coming prices should settle down.

Can I safely say the worst is behind us and incrementally margin pressures will abate and things will only improve?
I would not go that far to say that the worst is behind us, because there are a lot of uncertainties on the horizon including the continuation of the war in Russia and Ukraine. We are getting into the peak production season of palm in Malaysia and Indonesia and to that extent, the palm oil scene seems more comfortable. Soya oil and Sunflower oil are in the territory of uncertainty but net-net, the way prices have spiked, we should watch. I would not yet say that the worst is behind us.

With Ruchi Soya, the focus was on the oil business but now, you are also looking at merging some of your other businesses. What is the update in terms of inflationary pressures I mean in your other product lines?
There is a clear cut pressure on biscuits business, The spike in prices that we have witnessed in wheat flour and are seeing in palm oil and the edible oil and the sugar has been more stable of the three. Clearly there is massive pressure on certain businesses and we are trying our best because ultimately market is the final arbiter as to you know from whom they wish to buy and companies are looking at cost cuts, companies are looking at packaging some bit of planning around the weight of the package what is given to the consumer and likewise efforts are being made that how do you trim down the cost without impacting too much the consumer pricing.

So to that extent, I would confess that there are some pressure but we are working around those to make sure that we stay profitable and we do better so there is some efficiency. We are doing a lot of work on logistics and on setting up plants closer to the consumer location. But the industry is under pressure in certain segments.

What is the good news for a company like Ruchi Soya?
Anything which is pro-consumer is always positive. Edible oil continues to be the largest segment and it is very positive for us. We believe the market, the demand is pretty stable and the supply side is improving right now.

Our food business is extremely positive and likewise our oil palm plantation benefits from the higher pricing. Net-net, it is a good situation for Ruchi Soya in terms of how we go forward both in terms of the profitability and scale. I do not anticipate any significant setback on account of all these issues.