India has raised its import taxes on crude and refined vegetable oils by 5%-pts. While we expect an immediate negative reaction, we believe India’s long-term demand will still remain intact. This is due to the disappointing monsoon rains being experienced this season caused by El Nino, with the current rainfall deficit at 16%. Overweight Singapore/Indonesian plantation and maintain NEUTRAL on Malaysia. Top picks for the sector are First Resources and Genting Plantations.

India raises import taxes... India has raised import taxes on crude and refined vegetable oils by 5%-pts, according to a media report. The tax on crude vegetable oils has been hiked to 12.5% (from 7.5%), while tax on refined oils has been raised to 20% (from 15%).

…To protect own industries. This move is to protect local soybean farmers as well as the local edible oil refining industry. In the last 20 years, India's edible oil output has risen only about a 30%, while imports of vegetable oils have surged twelvefold to 14.4m tonnes to keep pace with growing consumption, making India the world's top buyer of cooking oils. According to Reuters, the cost of the edible oils imports are expected to rise about 40% to USD14bn this year (from USD10bn), driving several Indian mills out of business and forcing some farmers to switch to crops other than oilseeds such as soybeans.

Immediate negative reaction expected... While we expect an immediate negative reaction to this news, we believe the Indian market has already expected this move for a while now and could have stocked up beforehand, based on the 15.8% YoY rise in Indian palm oil imports from Malaysia in YTD-Aug 2015. Given that there was no change to the differential of rates between crude and refined oil imports, there is unlikely to be a switching of imports between crude and refined oils.

...But long-term demand strength still intact. We believe India will likely continue its large imports of palm oil after a short hiatus, as it may not have a choice. The Indian monsoon has been a disappointing one thus far. According to the Indian Economic Times, this year's monsoon could be one of the worst in nearly three decades, with the current rainfall deficit at 16%, likely due to the El Nino impact (see Figure 1).

Maintain sector call. No change to our Overweight on the Singaporean and Indonesian plantation stocks and Neutral on the Malaysian stocks.

Source: RHB Research - 21 Sep 2015