Highlights

• The Central Board of Exercise and Customs of India raised import duties on crude and refined edible oils by 5%-pts to 12.5% and 20% respectively.

• This is the 2nd time the Indian Government raised import duties on crude and refined edible oils within a year. Recall in Dec-2014, the Indian Government raised import duties on crude and refined edible oils by 5%-pts to 7.5% and 15% respectively. We believe such move is aimed at protecting the Indian farmers’ competitiveness given: (1) The current low edible oil prices globally; and (2) The sharp increase in India’s edible oil imports over the years (India’s edible oil import surged 26.7% yoy to 10.2m tonnes for the period of Nov-14 to Jul-15).

• India is Malaysia’s largest palm oil export destination, accounting for 19.6% of Malaysia’s total palm oil exports YTD.

Pros/Cons

• This is not a surprise move by the Indian Government; the Solvent Extractors’ Association of India has been lobbying for higher import duties in order to protect its local refiners.

• We believe the latest development is Neutral to the sector, as: (1) The latest move will not impair palm’s price competitiveness, given that the higher import duties are applicable to edible oils across the board; and (2) India will continue to import a significant amount of edible oil (evidenced by its huge dependence on imported edible oil, which accounts for as much as 70% of India’s total edible oil consumption).

Catalysts

• Implementation of higher biodiesel mandate in Indonesia and Malaysia.

• Weather uncertainties revisit, which would result in supply distortion, hence boosting prices of edible oil.

Risks

• Higher-than-expected soybean yield and soybean planting, resulting in lower soybean prices, hence prices of CPO.
• India imposes higher import duty on CPO.
• Escalating production cost (in particularly, labour cost).

Rating

NEUTRAL

Positives

• Long term sector outlook remains favourable.

Negatives

• Weak demand and price outlook. Sector view & top picks
• Maintain Neutral stance on the sector, with unchanged projected average CPO price assumptions of RM2,300/tonne and RM2,400/tonne for 2015 and 2016 respectively.
• For exposure to the sector, our top pick is CBIP (BUY; TP: RM2.10)

Source: Hong Leong Investment Bank Research - 21 Sep 2015