21/11/2011 (Daily News & Analysis) - Cost pressure for toilet soap makers Hindustan Unilever Ltd (HUL) and Godrej Consumer Products Ltd (GCPL) is likely to sustain as palm oil prices have inched up 11% from levels seen at the end of the quarter ended September.

Crude palm oil prices have surged 13.5% from recent lows, which can pose some margin challenge for HUL, RBS Equities (India) Ltd said in a note to clients on Friday, recommending a ‘Buy only on dips’ on the stock.

“The QTD (quarter to date) 11% upmove in palm oil spot prices, coupled with 4.6% INR depreciation, can pose some margin challenges for HUL. While HUL typically would have forward contracts for 1-2 quarters, the 16.2% INR move from August would impact costs,” said the report.

Crude palm oil is one of the key raw materials for soap makers.

For HUL, it accounted for close to 20% of its overall raw material costs last fiscal. While the maker of Lux, Lifebuoy, Breeze and Rexona soaps saw a 320 basis points margin expansion in the soaps and detergents business in the second quarter, it has nearly halved in the last decade.

HUL’s soaps and detergents business operated at unsustainably low margins of 12% during the quarter compared with average margins of 14.3% in the last five years, or an average 22.9% over the 2000-05 period.

The rupee has seen a 4.6% depreciation against the dollar since the end of the September quarter, 16.5% since August.

In a media interaction, HUL chairman, Harish Manwani, had said last month, “Commodities are globally linked in terms of pricing. We also make sure we buy a large part of our commodities on a global basis to take advantage of leverage.”