Regional Plantations - Maybank Kim Eng 2021-02-03: India Now Reduces CPO’s Import Tax Advantage

Regional Plantations - Maybank Kim Eng | FIRST RESOURCES LIMITED (SGX:EB5) BUMITAMA AGRI LTD. (SGX:P8Z)

Regional Plantations - India Now Reduces CPO’s Import Tax Advantage

CPO Futures reflected the negatives

  • Barely 3 months since the last revision, India again revised its import duties but this time to the detriment of CPO.
  • Overall, India raised CPO import taxes by 5-ppts to 32.5% with immediate effect while keeping other crude vegetable oils unchanged at 35%. 3M CPOF fell MYR93/t or 2.8% d-o-d to MYR3,391/t in reaction to the news.
  • Nonetheless, we maintain our POSITIVE call on the sector as small-mid cap stock prices have continued to lag CPO price rally.
  • We tactically upgrade IOI to BUY (from HOLD) as recent share price weakness now offers 16% upside to our target price. Our preferred BUYs are unchanged: First Resources (SGX:EB5), KL Kepong, Sarawak Oil Palms and Boustead Plantations.

India effectively raised CPO import taxes by 5-ppts

  • According to Reuters and Bloomberg (quoting Indian Finance Minister’s budget speech on 1 Feb), India cut the basic import duty of CPO by 12.5- ppts to 15% but imposed a new 17.5% levy on the imports bringing effective import taxes (i.e. duty plus levy) on CPO to 32.5%, a net increase of 5-ppts compared to the last revision (-10-ppts to 27.5%) made on 27 November 2020.
  • India has also cut the basic import duty on crude soybean and sunflower oils to 15% (from 35%) while an additional levy of 20% was added. Following the revisions, the effective taxes on the two crude vegetable oils are however unchanged at 35%.
  • We understand this new ruling is effective immediately. India has traditionally adjusted import taxes to control its food inflation and to provide a minimum price support for its domestic farmers.

CPO losing some price competitiveness in Feb 2021

  • The increase in Feb’s import duty of CPO has eroded the price advantage of CPO vis-à-vis other crude and refined vegetable oils. Recall that India bought 6.67mt of CPO or 51% of its total imports of 13.2mt in the Nov/Oct 2019/20 marketing year. For Nov-Dec 2020, India’s CPO imports rose to 1.34mt (+14% y-o-y) or 55% of India’s total imports of 2.41mt as CPO gained market share due to the favourable import duty cut back in Nov 2020.
  • With the new revision, the import duty differential between CPO and other crude vegetable oils has now narrowed to just 2.5% in Feb 2021 compared to 7.5% in Nov. Hence, we believe CPO will lose some market share back to sunflower or soybean oils.
  • While nothing was mentioned about the import duties of refined oils, it is believed to be unchanged at 45%. In any case, imports of refined oils made up just 3% of of total Indian imports in Nov/Oct 2019/20 marketing year, mainly because RBD Palm Olein was placed under the Restricted List since 8 Jan 2020.

Expect CPO to lose some market share to other oils

  • In general, we should see a slower import of CPO by India in the coming months. After all, India has somewhat rebuilt its inventories over the past few months with stockpile at 1.815mt (+32% y-o-y) as at 1 Jan 2021.
  • Positively, after recent CPO price correction, the 3-month CPO futures is now at a USD110/t discount to US soybean oil (vs USD146/t historical average) at the close of Bursa Malaysia Derivative Exchange on 2 Feb. The widened discount is seen to be supportive of demand again, compared to near price parity a month ago.
  • See more details and also the peer comparison of regional plantation stocks in report attached below.

Ong Chee Ting CA Maybank Kim Eng Research | 2021-02-03
SGX Stock Analyst Report BUY MAINTAIN BUY 1.960 SAME 1.960