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www.indiaratings.co.in 10 April 2014

Agri-Commodities




2014 Edible Oil Outlook
Refining Boosts Profitability
Outlook Report

Key Rating Drivers
Outlook Revision: India Ratings & Research (Ind-Ra) has upwardly revised its FY15 outlook
on the Indian edible oil sector to negative to stable from negative.
Ind-Ra expects the increase in the import duty on refined oils to 10% from 7.5% to improve the
operating profitability of most edible oil companies engaged in refinery and high-sea sales.
However, players with non-deferrable and higher capex commitments may continue to witness
strained cash flows resulting in additional debt drawdown and credit profiles remaining similar
to estimated FY14 levels. Companies with negligible capex will still register an improvement in
their credit profiles.
Palm & Soyabean Oil Prices to Remain Firm: According to reports from the United States
Department of Agriculture (USDA), the global growth in palm oil production (4.8% yoy) for oil
year November 2013 to October 2014 (OY14), is expected to be the second lowest in the last
ten years amid extended dry weather spells in Malaysia. According to the USDA, growth in the
production of soyabean oil, is expected to be 4.4% yoy supported by favourable climatic
conditions in South America (particularly Brazil and Argentina).
However, efforts towards meeting local bio-diesel mandates (Indonesia: combining 10% bio-
content with fossil fuel, Malaysia blending mandates under B7 7% palm oil blending with
fossil fuel and B5 - 5% palm oil blending with fossil fuel and Argentina: 10% blending with
fossil fuel) in key exporting countries is expected to reduce exportable surplus and
consequently the global stock-piles. The global palm oil stocks-to-use ratio (closing stock as a
percentage of consumption) is expected to be maintained at 12.3% in OY14 from 12.9% in
OY13 while the soyabean oil stock is expected to tighten to 7.4% from 8.3% resulting in both oil
prices remaining firm.
Switch Over to Soyabean Oil: Historically, significant contraction in premium enjoyed by
soyabean oil price over palm oil price has encouraged interchangeability. For 1QOY14, the
premium stands at USD75/mt compared to USD350/mt in 1QOY13. Ind-Ra expects this trend
in price difference to continue for OY14 and thereby spur higher demand for crude soyabean oil
imports. For 1QOY14, crude soyabean oil (CSO) imports registered an increase of 75.7% and
constituted 8.8% of the total edible oil import basket (1QOY13: 5.2%).
Refining Profitable, Margins to Improve: The change in Indias import duty structure
implemented in January 2014 is expected to widen the price differential between the landed
cost of imported edible crude oil and imported refined oil. Crude edible oil is expected to be
cheaper as compared to refined oil even after factoring refinery costs thereby making refining
economically viable. The agency expects this to boost imports of crude edible oil and in-turn
provide momentum to refinery operations as well as high sea sales.
Players with a presence in both refinery and high sea sales would stand to benefit both in terms
of top-line growth as well as higher capacity utilisation. This would result in better fixed cost
absorption and consequently higher margins. The agency expects FY15 margins for refiners to
be better than FY13 and FY14 levels.
Sector Outlook
NEGATIVE TO
STABLE
(2013: NEGATIVE)

Analysts
Janhavi Prabhu
+91 22 40001754
janhavi.prabhu@indiaratings.co.in

Ankit Bhembre

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2014 Edible Oil Outlook
April 2014
2

What can change the Outlook
Lower Capex: Any substantial reduction in proposed capex plans resulting in lower debt
drawdown and consequently improved leverage metrics (credit profile) could result in the
outlook being revised to stable.
Higher stock-piles: Higher-than-expected production levels could potentially outpace global
demand thereby resulting in a higher stock build-up. This could exert pressure on international
edible oil prices and trigger an outlook revision to negative.
Key Issues
Global Environment
Reduction in stock-to-use for Major Edible Oils
According to USDA reports, major edible oil supplies are expected to exceed consumption by
4.3mmt compared to 2.5mmt in OY13. The higher net surplus is expected to result in the stock-
to-use ratio swelling to a decade high of 12.3% (11.51%). However, Ind-Ra expects the
consumption to be higher than USDA estimates on account of a spurt in demand for alternative
usage (bio-diesel blending). This would be on account of prevailing international prices failing
to attract additional supplies in the international market with major exporting nations planning to
consume the same internally. This would help absorb the incremental production and also
control overall stock levels which in-turn would lend support to edible oil prices.
According to USDA reports, global major edible oil production in OY14 is expected to increase
5.2% yoy to 169mmt (OY13: 2% yoy to 160.7 million metric tons (mmt) supported by higher
production in Indonesia (palm oil: 8.7% yoy) Argentina (soyabean oil: 9.5% yoy) and Brazil
(soyabean oil: 7.5% yoy)). On the other hand global demand measured by domestic
consumption is expected to increase by 3.9% yoy to 164mmt in OY14 (OY13: 3.5% yoy to
158.4mmt).
Figure 1



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Global Edible Oils : YoY Change in Production & Consumption
Source: USDA
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2014 Edible Oil Outlook
April 2014
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Palm Oil
Higher production to be Diverted Internally Reducing Exports
According to USDA reports, the global palm oil production and consumption gap is expected to
narrow to 0.5mmt in OY14 compared to 0.8mmt in OY13. Production growth is expected to
remain subdued for OY14 at 4.8% yoy to 58.4mmt compared to 7.4% yoy to 55.8mmt in OY13
on account of unfavourable weather conditions in Malaysia (major producer) restricting
production to 19.2mmt (similar to that of last year). This is in spite of higher production in
Indonesia backed by higher acreage and yields. The USDA expects Indonesia to produce
31mmt for OY14 (OY13: 28.5mmt).
On the other hand, global palm oil consumption in OY14 is expected to grow at 5.3% yoy to
5.7mmt.
Ind-Ra expects major exporters (especially Indonesia) which have a favourable export tax
structure favouring refining and higher demand for bio-diesel to divert palm oil production for
domestic consumption as against off-loading at lesser lucrative realisations in the export
market. According to USDA reports, Indonesia is expected to divert 3.8mmt during OY14
compared to 2.9mmt of palm oil in OY13 for industrial use. In September 2013, Indonesia
increased its bio-fuel blending requirement to 10% from 7.5%.
According to the USDA, Malaysias nation-wide implementation of the B5 mandate would only
be possible by July 2014 for which its CPO requirement would be restricted to 0.25mmt for
OY14. The B7 programme with higher CPO demand is expected to be rolled-out only in
January 2015.
Price Differential to Make Blending Mandate Economically Viable
In 1QCY14, Brent crude oil prices were trading at a 6% premium over CPO (1QCY13: +30%
premium). Till the time crude edible oils trade at a discount to crude fossil fuels, blending will
remain economically viable.
Lower Palm Oil Inventory to Lend Support to Prices
The above events are likely to have two implications they could reduce the quantum available
for exports as well as control further inventory build-up in major exporting countries. This in turn
is expected to lend support to palm oil prices and check any sharp decline.
The USDA expects incremental exports of 0.6mmt for OY14 as compared to 3.6mmt in OY13.
The increase in consumption is expected to help maintain the global stock-to-use ratio at
12.3% in OY14 (OY13: 12.9%). For Indonesia, the stock-to-use for OY14 would be maintained
at 23.4% (OY13: 23.5%) while Malaysias stock-to-use is expected to plummet to 51.3%
(55.8%).
Figure 2


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2008-09 2009-10 2010-11 2011-12 2012-13 2013-14E
% change in production % change in consumption % change in exports (%)
YoY Percentage Change in Production and Consumption in Indonesia
and Malaysia
Curbing exports to other countries
Source: USDA and Ind-Ra
B5 Biodiesel Mandate: A blend of 5%
palm oil biodiesel and 95% petroleum
diesel.
B7 Biodiesel Mandate: A blend of 7%
palm oil biodiesel and 93% petroleum
diesel
Corporates



2014 Edible Oil Outlook
April 2014
4

Figure 3


Soyabean Oil
Currency depreciation Propels Higher Production Growth
According to USDA reports, soyabean production is expected to increase by 7.2% yoy to
287mmt (OY13: 268mmt) backed by increased acreage and favourable climatic conditions in
South America (especially Brazil (9.8% yoy), Argentina (9.5% yoy) and the US (8.4% yoy)). In
addition, currency depreciation has played a major role in prompting farmers (especially Brazil
and Argentina) to plant more soyabean.
This in turn is expected to translate into a larger crop and consequently higher oil availability.
For OY14, the global soyabean oil production is expected to increase by 4.4% yoy to 44.6mmt
supported by higher production in Brazil (8% yoy), Argentina (9.6% yoy) and China (5.3% yoy).
Global exports to slowdown
Simultaneously, consumption growth for OY14 is expected to increase 4.7% yoy to 44mmt
(0.5% yoy OY13: 42.3mmt) driven by higher demand from China (8.8% yoy), Brazil (3.5% yoy)
and Argentina (9.5%). With major exporting countries (especially Argentina) not expecting
lucrative realisations, they may choose to divert local production towards meeting internal bio-
fuel mandate requirements thereby reducing export trade. Global exports for OY14 are
expected to remain flat or decline marginally by 0.3% yoy to 9.2mmt. At the same time, Brazil
and Argentina are expected to witness an increase in OY14 consumption levels by 3.5% yoy
(OY13: 2.7% yoy) and 9.5% yoy (OY13: -24.7% yoy) respectively.
Thus the consumption growth is expected to help prevent any stock build-up and provide
support to prices. According to the USDA, the global stock-to-use ratio is expected to decline to
7.4% in OY14 from 8.3% in OY13.
Soyabean oil prices started declining from August 2013 in the anticipation of stock build-up in
OY14 on account of anticipated robust production and lower global demand especially in the
US (lower demand for soyabean oil as bio-fuel).
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Annual average price change (LHS) Ending stock % consumption (RHS) (%)
Avoiding Stock Build-up in Exporting Countries to Lend Support to Prices
Source: USDA and India Ratings
(%)
For 1QOY14, the palm oil prices
increased by 6.3% yoy after declining
23.4% yoy in OY13
In OY13, Brazil, which is one of the
major oil exporting countries, saw its
currency, the real, depreciate by
10.8%, counteracting the 9.8% decline
in international soyabean oil prices (in
USD) resulting in no major change in
realisations for local Brazilian
producers.
Corporates



2014 Edible Oil Outlook
April 2014
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Figure 4


Figure 5


Narrowing Differential between Palm & Soya Oil
Palm oil and soyabean oil enjoy strong interchangeability in terms for consumption/industrial
usage. Recently, the premium enjoyed by soyabean oil over palm oil has contracted
significantly and is likely to remain at the same levels in OY14. This may result in higher
demand for soyabean oil.
Figure 6



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Annual average price change (LHS) Ending stock % soyabean oil consumption (RHS)
Ending stock % soyabean consumption (RHS) (%)
Diversion for Internal Use by Exporting Countries to Provide Support to Prices
Source: USDA and Ind-Ra
(%)
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YoY change in BRL soyabean oil price (LHS) YoY change in BRL currency (RHS)
YoY change in soyabean oil price in USD (RHS)
(%)
YoY Change in Commodity Prices in BRL vis-a-vis International
Commodity Prices & BRL Currency
Source: USDA and Ind-Ra
(%)
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Jan 09 Jun 09 Nov 09 Apr 10 Sep 10 Feb 11 Jul 11 Dec 11 May 12 Oct 12 Mar 13 Aug 13 Jan 14
Crude palm oil Crude soya oil (USD/MT)
International Prices of Crude Palm Oil and Crude Soybean Oil
Source: Bloomberg and Ind-Ra
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2014 Edible Oil Outlook
April 2014
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Domestic Scenario
Figure 7
Domestic Demand/Supply Dynamics

2009/10 2010-11 2011-12 2012-13 2013-14F
Oilseed Production (In mmt) 32.9 35.7 36.3 36.8 38
Oilseeds crushed (In mmt) 25.1 29.1 28.9 29.2 29.4
% crushed (%) 76.3 81.7 79.4 79.3 77.6
Production of Edible Oils (In mmt) 7.8 8.5 8.1 7.5 7.6
Add: Imports (In mmt) 9.2 8.7 10.1 10.7 11.8
Total Supplies (In mmt) 17 17.2 18.2 18.1 19.4
Food Use Domestic Consumption (In mmt) 15.2 15.7 16.7 17.4 18.1
Import as a share of demand (%) 60.8 55.2 60.5 61.2 65.3
Source: USDA and Ind-Ra

Domestic Prices Mimic International Price Trends
According to the USDAs reports, Indias edible oil consumption for OY14 is expected to grow
4% yoy to 18.1mmt (17.4mmt) while production is expected increase marginally by 1.3% yoy to
7.6mt (OY13: 7.5mt). However, Indias supply side has historically remained constrained by
lower acreage and yields.
Given that India is largely deficient in edible oils; domestic prices tend to mimic international
prices since around 65% of the countrys total requirements are met by imports.
Figure 9
Refinery Operations Turn Viable
Current Situation Earlier
CPO CSO RBD RBD
Landed Price at Port (In US$) 810.0 882.0 842.0

Import Duty in India (%) 2.5 2.5 10.0 7.5
Tariff Price for calculating duty 964 985 1,002 -
Import Duty (US$) 24.1 24.6 100.2 -
Other charges (US$) 15.0 15.0 15.0 15.0
Total landed cost of CPO to Indian importers (US$) 849.1 921.6 957.2 15.0
Spread with CSO (US$/mt) 72.53
Spread with CSO (In %) 8.5
Spread with RBD (US$/mt) 108.1
Spread with RBD (In %) 12.7
Source: Ind-Ra

As can be seen above, the revised import duty structure has widened the price differential
between the landed cost of crude edible oil and refined edible oils once again making refinery
operations economically viable. The cost of conversion would determine the operating profit
generated by each company.
Increase in proportion of soyabean oil imports
For OY14, the agency expects the reduction in the price differential between Crude Palm Oil
(CPO) and Crude Soyabean oil (CSO) to translate into higher demand for the latter. For
1QOY14, the premium has shrunk 78.5% yoy to USD75/mt compared to USD350/mt in
1QOY13. This is expected to spur demand for crude soyabean oil imports in India and also
change edible oil import product composition.

Figure 8

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2014 Edible Oil Outlook
April 2014
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Figure 10


Other Edible Oils
Among other edible oils, domestic groundnut production for OY14 is expected to increase by
80% to 4.7mt from 2.6mt in OY13 on expectations of a good monsoon and higher sowing. As
per solvent extraction association (SEA) estimates, mustard seed production in OY14 is
expected to increase 10.8% yoy to 7.6mt (OY13: 6.9mt).
Financial Profile
Margins to Improve
The change in the import duty structure is expected to benefit edible oil companies in terms of
higher top-line growth due to increased high sea sales and refinery sales. It may also impact
trading operations which may experience a slowdown. With increase in proportion of higher
margin refinery sales in the overall sales mix, the overall profitability and margins of companies
are set to improve significantly in FY15 from FY14 and FY13 levels. The agency expects fully
integrated refiners with wider product portfolios to benefit more as compared to players with
limited product diversification. Players, whose portfolios include branded products would stand
to gain additional margins.
For FY13, the overall median margins contracted by 10bps (i.e. to 2.1% from 2.0%) on account
of unviability of refinery operations.
Working Capital & Liquidity
The agency expects higher working capital requirement for refiners especially on account of
inventory and receivables. This is because, refining unlike trading requires companies to stock
inventory for a higher period (especially raw materials and finished products). Receivable days
are also expected to increase given most players would be in the process of trying to expand
their reach (for both branded and unbranded products) and would be required to extend
additional credit period to their distributors/customers.
According to Industry Analysis Services, the FY15 capex commitments stand at INR4,500m
(FY13: INR5,159m and FY14: INR1,007m). Players with higher and non-deferrable capex may
continue to witness a strained cash flow position resulting in additional debt drawdown and
credit profiles remaining marginally lower or similar to estimated FY14 levels. However, players
with negligible capex are expected to witness an improvement in their credit profiles.
2013 Review
FY13 review
The unfavourable import duty structure continued to impact operations of domestic edible oil
companies in FY13. Of the total seven companies considered by the agency, the median
revenue growth tapered to 21.2% in FY13 from 34% in FY12.

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RBD CPO CSO
Increase in Proportion of CSO Imports
(%)
Source: SEA, Ind-Ra
For 1QOY14, the CSO accounted for
8.8% of the overall imported oils
compared to 5.2% in 1QOY13. Ind-Ra
expects domestic players with
balanced product portfolios (which
include both palm and soyabean oil) to
stand to benefit from such a switch
over in oils.
Corporates



2014 Edible Oil Outlook
April 2014
8

Apart from refinery sales, merchant exports/high sea sales (CPO sales to domestic refiners) for
large edible oil companies were also impacted on account of lower demand from local refiners
due to unviability of refining operations. Most players then tried to resort to increasing physical
exports/trading but faced large competition from smaller traders due to lower entry barriers and
also the latters ability to off-load at lower prices.
The above factors resulted in median operating profitability contracting by 10.9% yoy as
compared to 21.5% yoy growth in FY12. The median operating margins contracted by 40bps
during this period. Higher interest costs resulted in lower FFO and consequently operating cash
flows for most companies. However, lower capex during the year helped register higher FCF as
compared to FY12 which in turn resulted in no major debt drawdowns and consequently only a
marginal increase in debt levels. Thus, the median credit profiles have broadly remained the
same as compared to FY12 levels.
9MFY14 Update
The scenario continued (for the seven companies) in FY14 with revenue growth for 9MFY14
tapering to 8%. Operating profitability registered a decline of 7.3% yoy and median operation
margins contracted by an additional 20bps yoy. The median interest coverage for 9MFY14
deteriorated to 1.5x compared to 2.1x in 9MFY13 on the back of higher interest costs and
decline in operating profitability.
Figure 11


Figure 12



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FY10 FY11 FY12 FY13 9MFY14 yoy
Median revenue growth (LHS) Median EBITDA growth (LHS) EBITDA margin (RHS) (%)
9MFY14 Median Revenue Growth Tapering to 8% yoy Compared to FY13
Source: Ace Equity, Ind-Ra
(%)
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FY10 FY11 FY12 FY13 9MFY13 yoy 9MFY14 yoy
Net debt/EBITDA EBITDA/Interest
Credit Profile for 9mFY14 Has Deteriorated Compared to 9MFY13
(%)
Source: Ace Equity, Ind-Ra
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2014 Edible Oil Outlook
April 2014
9

Appendix

Figure 13
Issuer Ratings
Issuers Long-term rating Short-term rating Outlook
Liberty Oil Mills Limited IND BBB IND A2 Negative
NCML Industries Limited IND BBB+ IND A2 Stable
Haryana Oils & Soya Limited. IND B+ IND A4 Stable
Bhagirathi Oil Industry IND B+ - Stable
Balaji Oil Industries (P) Ltd IND BB- IND A4+ Stable
JMD Oils Private Limited IND BBB- IND A3 Stable
Dinesh Oils Limited IND BB+ IND A4+ Stable
Source: Ind-Ra



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2014 Edible Oil Outlook
April 2014
10




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