Emami to produce mentha oil to reduce raw material costs

Personal-care products maker Emami is planning to produce its key raw material – mentha oil, with an aim to control the increasing costs that could threaten to cut down its margins.

Emami said that the price of the key balm ingredient, which accounts for 20% of its raw material costs, has been unpredictable for sometime and the rising prices would pose big challenges in 2012-13, leading to pressurised margins.

Kolkata-based consumer goods firm said that it is evaluating backward integration for mentha oil through its own plantation, and has been booking the raw material in advance to minimise the impact of inflation.

Emami also has stopped the fresh procurement contracts for mentha oil, owing to the possible high volatility in prices, reported Daily News & Analysis.

The firm has also started to store higher quantities of some raw materials owing to the high possibility of procurement costs that could increase in near term.

For cost-effective purchases, Emami has increased the purchase of material from tax-exempted zones (North East, Uttaranchal and Himachal Pradesh).

Prices of the oil has been as low as INR700 ($12.6) a ton in March 2010 to a high of INR2,700 ($48.8) in January 2012 before easing a bit.

Emami told the publication that the rising costs of the ingredient has led to a decline in gross margins in the last three years of operations.

The company expects 16-18% growth in its power brands over the next two years, which is subject to reduction in menthol prices.

Besides commodity price hike, the company also notes that there could be dip in consumer spending as a result of the rising inflation and hence to counter this, it plans to enlarge its reach, particularly in the rural areas.