Soapmakers could cut prices as inputs get cheaper

Soap manufacturers might be in a position to pass along lower input costs to consumers in the coming festive period, as the price of palm oil, a key ingredient, remains tepid.

In the past six months, the palm oil price has decreased by 20 per cent, according to data sourced from the Mumbai Oil Seeds Association (see chart).

The forecast is that palm oil prices are not likely to pick up anytime soon, as a production glut in markets such as Indonesia and Malaysia, the number one and two producers of palm oil in the world, coupled with strong soya bean output, keep prices depressed. Soya bean oil can be used as a substitute for palm oil and an increase in production of the former can push down prices of the latter, commodity analysts say.

Dorab Mistry, director, Godrej International, said, "Plantations were complacent that with El Niño this year, prices would rise. Besides, production has been better than expected. And, both Indonesia and Malaysia have failed to implement their palm biodiesel mandates."

Soap manufacturers Hindustan Unilever (HUL) and Godrej Consumer (GCPL) did not indicate their course of action. Consumer goods analysts say either a price drop or increase in sales promotions is likely.

"Volume growth in soaps has been very sluggish in recent quarters. Companies could use every opportunity they have to improve it," said Naveen Kulkarni, co-head of research at brokerage house PhillipCapital.

Gautam Duggad, vice-president, research, Motilal Oswal Financial Services, said, "Companies will work towards improving volumes if given the chance. Lower input costs is one such lever that gives them room to push volumes."

In the June quarter, sales volumes decreased (analysts estimate volume growth was down by two or three per cent) as consumers kept spending in check, owing to inflationary pressure. The trend in the fourth quarter of the last financial year was no better, as growth remained negative (estimated at minus two per cent), though before that in the December, September and June quarters of 2013-14, volume growth was in low single digits (between two and four per cent).

Market sources say GCPL increased grammage by 10 per cent on its brand Godrej No 1 recently, as lower input costs have given the company an opportunity to do so. Sources estimate HUL might also increase such promotional drives on its brands, mostly mass-market, as it strives to improve volumes in the category.