The number of growing sanctions and bans on Russian imports from around the world is increasing by the day. Moreover, Ukraine has been forced to close its grain ports in the Black Sea because of the war.
The magnitude of impact on the commodities market is expected to be enormous.
In this article, we focus on a commodity that’s buzzing and making headlines – Wheat.
Yes, we are talking about the supply of wheat and the possibility that the world could be looking at a food shortage if the Russia–Ukraine war continues to drag on.
The reason is simple.
Both Russia and Ukraine together account for 29% of the global wheat exports. The ongoing geo-political tension essentially puts a large chunk of the world’s wheat off the table for consumption in the foreseeable future.
So, the question is – where does India fit in this situation?
Impact of the Russia–Ukraine War on India’s Wheat Export Strategy
India’s wheat production has primarily catered to the needs on the domestic front. Between 2017 and 2021, India exported only 2% of its wheat supply while the remaining stock was either stored for future use or consumed domestically.
The Ukraine–Russia war has created a silver lining for Indian wheat producers by disrupting the established global agri-commodity chain.
The conventional breadbaskets of Europe are no longer able to meet the demands of the market. This means more business for India as the country is the second largest producer of wheat after China.
That too, at the cheapest of prices among its global competitors.
The year 2022 promises to be a bumper one with good prospects of record wheat production estimated to reach 111.3 m tonnes.
Moreover, the quality, texture and taste of the wheat are comparable to its Russian Red Sea wheat counterpart, making it a perfect replacement.
If the government of India plays its cards right, India may well be the country that can fill the wheat depleted granaries for many countries that were dependent on Russia and Ukraine.
If reports are to be believed, India is planning to boost its wheat exports so that it can cash in on higher prices of this food staple in the international market.
The government is planning to tap into diplomatic missions to handhold wheat exporters in 2022 to speed up the process and expand their reach to new markets like Indonesia, Turkey, Italy, and Nigeria.
Delegations from Egypt are expected to visit India in the first week of April 2022 to facilitate talks to secure greater quantities of wheat exports from India.
Not only will this benefit the rural economy but give wheat exporting companies a chance to ship record quantities in the current financial year.
With an uptick in Indian wheat prices in world markets, wheat stocks in India are back in focus again.
So, let’s look at some of the companies that may possibly gain as wheat becomes the next hot commodity in the market.
In the ongoing Russia–Ukraine war, ITC could be a potential gainer as it presents a huge opportunity for them to grow their agri-business revenue.
The impact can already be seen on its stock price which has been on an upward trend for the past month.
ITC has already witnessed up to 100% year-on-year revenue growth in the third quarter of the financial year 2022.
This was primarily driven by its wheat exports. Other products that have also contributed to the revenue spike are commodities like rice and spices.
‘Aashirvaad Atta’, a leading ITC agri-product consolidated its leadership position in the branded atta industry in India.
Moreover, the company exported significant quantities of wheat in fiscal 2022 to fulfil the needs of a global population dependent on supplies from Russia and Ukraine.
Wheat prices soared to a 14-year high in the international market. This could potentially turn people away towards more rice consumption until supply and prices of wheat normalise.
This again, could mean more business for ITC as it can find its way into the homes of new consumers on a global platform.
To boost production, ITC has proactively scaled up its wheat development program.
It has also introduced several location-specific superior seed varieties that cater to the needs of new markets like Bangladesh, Middle East, and parts of southeast Asia where there is strong demand for its products.
#2 Adani Wilmar
The turbulence in Ukraine and the isolation of Russia opened a window of opportunity for Adani Wilmar, also home to the popular wheat brand ‘Fortune Atta’.
Armed with the aspiration to become India’s largest food FMCG player, the company recorded a 46% revenue growth from this food and FMCG in fiscal 2022. Exports in the food and FMCG segment rose by 31% during the same period.
Wheat contributed 38% of this ₹18.6 bn in sales. It continues to hold the second position in the Indian market.
The company had already ramped up its capacity utilisation to 80% way back in December 2020. In addition to its Nimrana plant, Adani Wilmar outsources wheat flour production to four other plants.
This has been one of the key driving forces that enabled Adani Wilmar to increase its market share in wheat flour to 4.4% in the fiscal year 2022.
The company has decided to focus on expanding the FMCG food category over the next 5 to 10 years as its edible oils segment is already in a steady and mature stage.
Since the Russia–Ukraine conflict began over a month ago, the stock price of Adani Wilmar has rallied 63% to hit a record high of ₹608.90on the Bombay Stock Exchange.
This spike in share price is being driven in the backdrop of the disruption in the supply of sunflower oil which again is largely supplied by Russia and Ukraine.
The company has a solid foundation to build on its wheat exports in the coming months, making it one of the possible gainers of this conflict.
#3 Hindustan Unilever
Even though HUL is not a ‘wheat stock’ per se, given its role in the Indian wheat market with Annapurna Farm Fresh Atta brand, it makes sense to at least consider it.
Hindustan Unilever (HUL) is one of your ‘do it all’ companies that serve customers across the value chain.
Through its large food portfolio, HUL is among the leading names globally. It’s home to popular brands like Kissan, Lipton, Horlicks, Knorr, Hellman’s, and much more.
With revenues of ₹132.04 bn, the company recorded the highest yearly market share gain in decades with an agile and flexible supply chain.
Though not a focus area, its food and refreshment segment recorded a 3% YoY sales growth in fiscal 2022.
As the war continues, the company should logically see strong demand for its wheat products in the international market and should seek methods to increase its own production.
HUL is virtually debt free and reported an overall sales growth of 18.6% in the last year. It has strong linkages to its parent company Unilever Plc. It can strengthen its supply chain and distribution network further to meet the demands of wheat deprived market.
As EBITDA margins continue to be in a healthy range, it is quite likely that HUL will fare well in the coming months.
Can India make its mark as a serious wheat exporter?
This attention to wheat stocks in India does not really come as surprise as the supply dynamics have been impacted in multiple ways.
That said, it’s the right time for India to make its mark as a serious wheat exporter and help stabilise global prices to the best extent possible.
The goods are there. An upcoming harvest season that coincides well with the supply crunch. Buffer stocks. And a bumper crop.
Together, India can become the next big player poised to step in to fill in this global wheat void.
From an investing perspective, this may be the right time to piggyback on this trend and bet on agri-related stocks. Think of it as a short-term trade and not an investment.
But be prepared to cut your losses if things don’t go your way.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
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(This article is syndicated from Equitymaster.com)
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