29/06/2011 (moneycontrol.com) - Fast moving consumer goods major Hindustan Unilever and local rival Godrej Consumer Products is likely to get some respite from declining margins due to a drop in prices of palm oil, a key raw material for their soaps, this fiscal.

Margins of FMCG companies took a hit last year as prices of palm oil and other raw materials spiraled. Palm oil prices, for instance, touched a three-year high of Rs 58,320 a tonne in February, according to Edelweiss Securities.

However, palm oil prices have declined around 18% since February to a seven month low in June due to rising inventories, higher supplies and fall in crude oil prices. The prices are expected to fall further as the off-take will reduce from west Asian countries post the festive buying for Ramadan in August.

HUL, the largest FMCG company in India, saw a decline in margins in the fourth quarter.  Its EBITDA (earnings before interest, taxes, depreciation and amortization) margin in January-March contracted 60 bps to 13%, while gross margin declined 290 bps to 46.5%.

Godrej Consumer, which has a 10.1% market share in soaps, too was hit by high input costs, which more than doubled year-on-year to Rs 287.10 crore in the fourth quarter.

According to brokerage Motilal Oswal the company’s standalone EBITDA margin declined to 18.5% from 24.8% a year ago, while standalone gross margin contracted to 47% from 59.4% during the quarter. The margin declined despite a 5% price hike it took in soaps. Several acquisitions that the company made during the year boosted Godrej Consumer’s earnings on a consolidated basis.

Soaps contribute to 21% of HUL’s total sales, while their contribution is higher at 23% for Godrej Consumer. 

Palm oil accounts for 16-17% of the total raw material costs for HUL and 25-28% for Godrej Consumer, according to Mehul Desai, an analyst at KR Choksey Shares.

"The decline in palm oil prices will be positive for HUL and Godrej Consumer. We can expect some margin improvement in the second and third quarter (of this fiscal)," Desai told moneycontrol.com.

The improvement in margins is likely to be higher on a sequential basis as the prices remain high compared to a year ago, analysts say.

HUL and Godrej Consumer will be the "biggest beneficiaries" of softening of palm oil prices, according to Abneesh Roy and Harsh Mehta of Edelweiss. The fall in palm oil prices will also marginally benefit ITC , which has a 6% market share in soaps, they said.

"This (decline) will also provide the companies with some headroom for price reduction, which should prop up volume growth," Roy and Mehta said in a report. 

The decline in palm oil prices is also expected to cushion increase in freight costs due to the recent Rs 3 hike in diesel prices by the government.

HUL shares were up 0.5% at Rs 323.95, while Godrej Consumer was up 0.8% at Rs 411.40 on NSE Tuesday.