Oct 15: India's edible oil refiners are set to clock healthy revenue growth of 10-12% this fiscal despite a lowering of import duty on crude edible oil. That compares with 14-16% growth last fiscal, which benefited from a price rise in the second half.
While the duty cut this September would soften domestic realisations in the second half of this fiscal, elevated global edible oil prices, strong first-half performance and improving consumption would support revenue growth.
An analysis of 84 edible oil refiners rated by us, accounting for nearly half of the industry's revenue, indicates that healthy cash generation, stable profitability and controlled leverage will continue to support their credit profiles.
India imports over 60% of its edible oil requirement, making the industry highly sensitive to global price movements. Crude palm oil, which accounts for more than half of India's edible oil imports, is the key pricing benchmark for the domestic edible oil basket. Consequently, movements in global CPO prices are quickly transmitted to domestic markets.
Global edible oil prices are expected to remain elevated this fiscal amid weather-related supply concerns in major producing regions and sustained biodiesel demand. Crisil Ratings expects global CPO prices to rise 9-11% this fiscal. While higher production of soybean, sunflower and mustard oils could provide some relief, tight palm oil supplies are likely to keep global edible oil prices firm.
In the first half of the current fiscal, global CPO prices rose 11-13%, pushing average landed costs to around $1,240 per tonne. Coupled with import duties of 16.5% on crude edible oils, this led to higher domestic edible oil prices and stronger realisations for refiners.
To moderate food inflation and improve affordability, the Government of India recently reduced import duties on crude edible oils. Consequently, the effective import duty on crude palm and soybean oils has declined to 11.0% from 16.5%, and that on crude sunflower oil to 5.5% from 16.5%. However, a meaningful duty differential between crude and refined oils remains, continuing to support domestic refining activity.
Says Rahul Guha, Senior Director, Crisil Ratings,
“The duty rationalisation should temper industry realisations by 5-6% in the second half, but the resultant improvement in affordability should lend fresh impetus to consumption. The full-year picture, however, remains favourable, with firm global edible oil prices and strong first-half realisations expected to keep average realisations 8-10% above last fiscal.”
Consumption has remained resilient despite higher prices and is expected to strengthen further as lower retail prices improve affordability in the second half, particularly during the festive season. Demand is likely to grow across households, food processing companies and the hotel, restaurant and catering segment. Overall edible oil consumption is projected to rise 2.7-3.0% to about ~26.5 million metric tonne this fiscal.
Thus, the combination of higher average realisations and healthy volume growth should drive robust industry revenue growth this fiscal, despite softer pricing in the second half.
Says Jayashree Nandakumar, Director, Crisil Ratings,
“Healthy volume growth and operating leverage should support profitability. Ebitda per tonne is seen up 10-12% from last fiscal to ~Rs 3,850-3,950. Inventory gains of the first half are likely to offset softer pricing in the second half, keeping operating margins broadly stable at 3.4- 3.6%, while prudent hedging should limit the impact of commodity price volatility.”
With demand rising steadily, refiners have expanded capacity over the years. This fiscal, the capex of refiners rated by is seen at Rs 1,600-1,800 crore, translating into ~10% increase in refining capacity. Prudent funding of capex, supported by healthy cash accruals, should keep incremental borrowings in check and support stable credit profiles.
Net cash accrual to total debt and interest coverage are expected to remain comfortable at around 0.17 time and 2.4 times, respectively, this fiscal. Total outside liabilities to adjusted net worth is expected to remain range-bound at 1.5-1.7 times over the medium term.
The trajectory of global edible oil prices, developments in the Middle East, changes in India's import duty regime and evolving global trade dynamics will remain key monitorables for the sector.
