Soap manufacturers skid over rising palm oil prices

Vidrum / 06 Dec 2011

Major companies in the personal wash segment are facing serious headwinds due to the rise in the prices of palm oil, which is one of the key ingredients in the manufacturing of soaps.

According to a presentation in the International Conference on Soap, Detergent and Cosmetics (ISDC), the market size of the personal wash segment is currently at approximately US$ 1.5 billion, and is expected to grow at 10%-12%. The major market players in the segment are Hindustan Unilever (HUL), which holds 55% market share, and Godrej Consumer Products (GCPL), which holds 10% market share. HUL has major brands like Lux, Lifebuoy, Pears, Dove, etc. in its product basket, while Godrej Consumer Products has Cinthol, Godrej No 1, etc. The companies are facing serious headwinds due to the rise in the prices of palm oil, which is one of the key ingredients in the manufacturing of soaps.

Palm oil is derived from the fruits and nuts of oil palms, and is used as edible fat for making soap. It is yellow in colour. Palm oil is a key ingredient for making soap, and at present, it is impacting the players of the soap market quite heavily.

The prices of palm oil has cooled off on a YTD basis, but are still on the higher side if we compare the prices on a YoY basis. This is evidence from the fact that during the period from October 2010 to October 2011, we witnessed an 8.39% price rise. This was on the back of a 5% fall in prices in October 2011. On a YTD basis, palm oil prices have fallen by 20%. The rupee depreciation, however, has marred the cooling of prices, and the companies continue to face pressures on this front.

The following table shows the realisation per tonne and cost per tonne of GCPL and HUL.

Soaps Segment GCPL HUL

2011 2010 % Change 2011 2010 % Change
Sales Turnover (Cr) 795.86 828.38 -3.93 3939 3727 5.69
Realization / tonne (Rs) 89880 89487 0.44 102179 104868 -2.56
Raw Material  - Oil and Fats (Cr) 317.36 260.58 21.79 1163.65 829.25 40.33
Cost / tonne (Rs) 41166.4 31131.5 32.23 47208 38959 21.17
*In case of HUL we have converted Soaps Million numbers into Metric tones for calculating Realization. (Assuming each soap of 100 gram)

From the table, we can see that raw material costs form a major chunk, and are at approximately 41% and 47% of the turnover for GCPL and HUL respectively. The cost per tonne of raw materials has increased considerably, while that for sales has remained subdued. The companies have passed on the increase in costs to the customers, which is evident from the fact that realisation per tonne (sales) has remained subdued for both the companies. GCPL has increased the prices by 8%-10% of their soap products approximately.

The soaps segment has huge potential to grow, and with an untapped rural market, there are huge opportunities going forward. We feel that rising input costs will continue to remain a major headache for the companies. However, strong volume growth, as also, the ability to pass on the price rise to the customers helps these companies to show good performance going ahead.

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