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

FIRST RESOURCES LIMITED (SGX:EB5) BUMITAMA AGRI LTD. (SGX:P8Z)

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

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.

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.

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.

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 | https://www.maybank-ke.com.sg/ 2021-02-03

SGX Stock Analyst Report BUY MAINTAIN BUY 1.960 SAME 1.960

BUY MAINTAIN BUY 0.780 SAME 0.780