Corporates

Food / India

2012 Outlook: Indian Edible Oils

Liquidity under Pressure
Outlook Report

Rating Outlook Rating Outlook

NEGATIVE Negative Outlook: Fitch Ratings‟ outlook for the Indian edible oil industry in 2012 is negative.
The agency expects higher revenue growth led by firm pricing on global cues of lower stock to
consumption ratio to be offset against higher input costs resulting in margin pressures. Fitch
expects the margin pressures coupled with higher working-capital needs and expansion plans
to exert pressure on the liquidity profiles of most edible oil companies.

Prices to Remain Firm: Fitch expects the prices of most edible oils will remain firm. A limited
increase in global crude palm oil (CPO) production expected by Fitch will be off-set by higher
demand from India and China. Soyabean production growth is likely to be lower in 2012 due to
poor weather conditions in South America. Further Fitch expects overall production of mustard
and groundnut oilseeds to decline due to lower acreage and yields that would result in lower
crushing and output.

Refining to Boost Trading: Reduction in export duty on refined palm oil and increase in duty
on CPO by Indonesia is likely to result in lower capacity utilisation for refiners and a surge in
trade of refined palm oil.

Margin Pressure: The operating margins of established companies (particularly refiners)

would be squeezed by competition from even small-sized, refined palm oil importers. However,
companies with backward integration extending to the plantation level would have increased
control over supplies and be in a better position to mitigate this risk to an extent. Fitch expects
margin pressures in other edible oils (excluding palm) when palm oil is available at a significant
price discount (more than 20%) to the other edible oils.

Liquidity Pressure: Most edible oil companies will have lower operating cash flow (CFO) over
2012. This, coupled with higher working-capital needs (on account of increased inventory) and
inflexibility to defer capex, would result in further pressure on free cash flow (FCF) of
companies. The agency notes that non-integrated companies particularly refiners who have
undertaken largely debt-funded capacity additions/expansion especially in palm oil refining will
face greater liquidity pressures.

Impact on Credit Profiles: Companies with lower or no branded products segment, non-
diversified product portfolio and inability to defer capex will register significant deterioration in
overall credit metrics. Fitch expects Liberty Oil Mills Limited („Fitch BBB–(ind)‟/Stable) to
maintain its stable credit profiles led by higher cash balance and lower debt.
Related Research
What Could Change the Outlook
Other Outlooks
www.fitchratings.com/outlooks Regulatory Changes: Outlook may be revised to stable if there are any positive regulatory
changes either in oil-producing countries (such as Indonesia and Malaysia) or in India (where
Analysts countervailing duty is imposed) that improve the economic viability of refining operations in
Janhavi Prabhu India. Additionally, any substantial reduction in proposed capex plans that reduces leverage
+91 22 4000 1700
janhavi.prabhu@fitchratings.com would also aid in reverting the outlook to stable.
Niraj Rathi
+91 40 4025 8622
niraj.rathi@fitchratings.com

Carrol D„Silva
+91 22 4000 1731
carrol.dsilva@fitchratings.com

www.fitchratings.com 25 January 2012

 Corporates

Key Issues
Robust Domestic Demand and Lagging Production to Result in Firm Prices
According to the United States Department of Agriculture (USDA) reports, India‟s edible oil
consumption is expected to grow at a CAGR of 5% yoy to 17.1 million tons (mt) for 2011-12
from 16.3mt in 2010-11 while domestic edible oil supply will increase by 3.9% yoy to 8.0mt from
7.7mt. India is a large importer of edible oil and domestic edible oil prices generally tend to
exhibit a strong correlation with international prices particularly of palm oil and soyabean oil.

Figure 1
Domestic Demand/Supply Dynamics
2008-09 2009-10 2010-11 2011-12f 2012-13f
Population (bn) 1.2 1.2 1.3 1.3 1.4
Total demand (mt) 14.5 15.3 16.3 17.1 18.0
Domestic supply of edible oils (mt) 5.7 6.2 7.7 8.0 8.2
Import of edible oils (mt) 8.8 9.1 8.6 9.1 9.8
Import as share of demand (%) 60.6 59.3 52.8 53.4 54.4
Source: USDA & Fitch analysis

Fitch expects the share of total imports to consumption to increase to 53.4% in 2011-12 and
54.4% in 2012-13. Of the total oil imported, palm oil contributes a major proportion (about 80%)
of the overall imports followed by soya bean oil (about 11%) and sunflower oil (about 9%).

Figure 2

Consumption Pattern in India

Palm oil contributes a major proportion of overall consumption

(000 mt) Cottonseed Palm Rapeseed Soybean Others

17,500

14,000

10,500

7,000

3,500

0
2007-08 2008-09 2009-10 2010-11 2011-12
Source: USDA

Palm oil, being the cheapest, constitutes the largest proportion (about 44% of the total edible oil
consumption) of the overall oil consumed. However, the growth rate depends on the price
difference it enjoys with respect to soyabean oil and other substitutes. Historically, whenever,
palm oil was 20% or more cheaper than the other oils (soyabean and rapeseed/mustard), palm
oil demand was higher compared with soyabean and rapeseed/mustard oils. On the other hand,
when this discount narrowed during Q210-Q211, demand for soyabean oil and other oils
(rapeseed/mustard/sunflower) grew at a much higher rate. Currently, palm oil is over 20%
cheaper than other oils suggesting stronger growth rate in its demand in comparison with other
edible oils (except sunflower oil, which shows consistently high growth).

Palm Oil
India is a heavy importer of palm oil with a major proportion being imported from Indonesia.
Fitch expects CPO prices to remain strong in 2012. According to USDA reports, overall CPO
production in Indonesia is expected to moderately rise while it will remain flat in Malaysia due to
lower yields. Increase in global CPO production will be off-set by higher demand from India and
China. Additionally, any further depreciation in INR will make Indian imports costlier.

Related Criteria
Corporate Rating Methodology (August 2011)

2012 Outlook: Indian Edible Oils 2

January 2012
 Corporates

Figure 3

International Prices of CPO

(USD/mt)
1,400

1,200

1,000

800

600

400
Nov 09 Mar 10 Jul 10 Dec 10 Apr 11 Aug 11 Jan 12
Source: Bloomberg

Other Edible Oil

Fitch expects Indian oilseed production to increase marginally, led by higher production of
soyabean, cottonseed and sunflower oil while production of mustard and groundnut seeds will
decline due to lower acreage and a switchover to other remunerative crops. However, Fitch
expects this to result in a marginal increase in overall domestic edible oil production to 8mt in
2012.

Globally, soyabean oil (the next largely consumed oil domestically) production will increase at a
pace much slower than the preceding years due to poor weather conditions in major soyabean
oilseeds producing countries such as Argentina and Brazil. This could exert some upward
pressure on international soyabean oil prices.

Figure 4

Rising Edible Oil Prices

(10/kg) Groundnut oil Palm oil (crude) Soybean oil (refined) Mustard oil
1,200

950

700

450

200
Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11

Source: CMIE

Concerns exist about the development of La Nina the ocean atmosphere phenomenon. A
strong La Nina is usually associated with above-average rainfall in Indonesia and Malaysia
(detrimental to palm production) and drought in soyabean producing regions of South America.
While recent observation of the Southern Oscillation Index tend to indicate a La Nina of weak to
moderate strength, a limited adverse impact may still be expected on production of palm and
soyabean.

Improved Viability of Exported Refined Palm Oil

To encourage refining and packaging operations, the Indonesian government revised its palm
oil export duty structure from 15 September 2011. According to the new regulations, the
revised export duty structure is as follows:

2012 Outlook: Indian Edible Oils 3

January 2012
 Corporates

Figure 5
Indonesian Export Duty Structure for Palm Oil
Product (%) Old duty structure New duty structure
Crude palm oil 15.0 16.5
Refined bleached deodorized palm oil (RBD) bulk 15.0 8.0
RBD consumer bulk 10.0 2.0
Source: SEA

The duty structure is advantageous to Indonesian refiners than for Indian refiners who typically
import CPO for refining in India. In the absence of a countervailing tariff by Indian authorities,
the Indonesian duty structure will encourage import of refined palm oil compared with CPO.

Contraction in Refining Spread to Boost Trading

Figure 6
Pre and Post Impact of Implantation of Indonesian Export Duty
Structure for Palm Oil
After implantation of Before implantation of
Indonesian duty Indonesian duty
structure structure
CPO RBD CPO RBD
Currenta price (USD) 968.0 1,037.5 943.0 1,018.4
Export duty by Indonesia (%) 16.5 8.0 15.0 15.0
Price after export duty (USD) 1,127.7 1,120.5 1,113.1 1,193.1

Import duty in India (%) 0 7.70 0 7.70

Tariff price for calculating duty 0% 484.0 0% 484.0
Import duty (USD) 0 37.3 0 37.3

Total cost of import to Indian importers (USD) 1,127.7 1,157.8 1,113.1 1,230.4
a
Price at 13 January 2012
Source: Fitch

The figure indicates the difference between the total landed cost of CPO and refined palm oil.
Further refining costs would result in higher cost of producing refined palm oil production from
CPO in comparison to landed cost of imported refined oil. Fitch expects this move to result in
lower capacity utilisation of palm oil refining and increase in the proportion of trading in refined
palm oil during 2012.

Margin Pressures
Fitch expects palm oil refiners to experience margin pressures due to lower refining operations
and increased trading activities. Companies with increased control over suppliers extending to
the plantation level would be able to off-set this risk to a limited extent. For 2012 integrated oil
companies are likely to register better margins than refiners.

Figure 7

EBITDA Margin Under Pressure

Adani Wilmar Vijay Solvex Ruchi Soya
(%)
Gokul Refoils Sanwaria Agro Liberty Oil
12
10
8
6
4
2
0
FY08 FY09 FY10 FY11
Source: CMIE

2012 Outlook: Indian Edible Oils 4

January 2012
 Corporates

Although a higher proportion of refined palm oil purchases would expose companies to higher
foreign-exchange risk, companies with prudent foreign exchange hedging policies would be
able to substantially reduce overall margin volatility. Companies with higher proportion of
branded products have the ability to absorb margin pressures through the brand cushion
resulting in a relatively limited deterioration in margins.

Figure 8

Quarterly EBITDA Margin

(%) Vijay Solvex Ruchi Soya Gokul Refoils Sanwaria Agro
10
8
6
4
2
0
-2
-4
Jun 10 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11
Source: CMIE

Working-Capital Cycle and Liquidity

Fitch expects margin pressures and higher inventory positions based on firm prices to exert
pressure on CFO. Companies that expanded their capacity (typically in palm refining) over the
past two to three years are likely to face challenges with respect to their debt servicing ability in
2012. However, companies with the ability to defer capex are expected to maintain their credit
profile during expected cash flow reduction.

Figure 9

Inventory Days Increased for Large Players

Adani Wilmar Vijay Solvex Ruchi Soya
(Days)
Gokul Refoils Sanwaria Agro Liberty
200

150

100

50

0
FY08 FY09 FY10 FY11
Source: Company, Fitch

Fitch affirmed the National Long-Term Rating of Liberty Oil Mills Ltd at „Fitch BBB–(ind)‟ with
Stable Outlook on 23 May 2010 to reflect its established place in the Indian palm oil market,
comfortable liquidity and higher cash balances.

2012 Outlook: Indian Edible Oils 5

January 2012
 Corporates

Figure 10

Increase in Net Leverage (Adjusted Net Debt/EBITDA)

Adani Wilmar Vijay Solvex Ruchi Soya Gokul Refoils Sanwaria Agro Liberty
(x)
6.5
5.5
4.5
3.5
2.5
1.5
0.5
2007-08 2008-09 2009-10 2010-11
Source: CMIE, companies, Fitch

2011 Review
Revenue increased for most edible oil companies in 2011 led by higher average sales. Rising
input costs because of rupee depreciation and disposing inventory built up between January
and March 2011 (rally in palm oil extended until March 2011) resulted in margin pressures for
most companies. Companies with higher proportion of branded products were able to partially
withstand the impact due to the brand cushion.

Peer Comparison for FY11

Figure 11
Companies in the Edible Oil Industry
Adani Vijay Ruchi Gokul
(INRm) Wilmar Solvex Soya Refoils Liberty
National Long-Term Rating Fitch BBB–(ind)/Stable

Year-end FY11 FY11 FY11 FY11 FY11

Revenue 85,596.6 6,134.9 166,352.9 45,398.3 19,335.1

EBITDA 1,120.2 145.9 6,621.2 1,602.7 332.5
EBITDA margin (%) 1.3 2.4 4.0 3.5 1.7
Interest 871.7 68.3 2,816.5 544.0 58.8
Debt 10,520.2 975.7 34,663.1 3,850.8 8,062.9
Cash 1,760.5 38.6 12,573.9 129.9 7,677.9
Adjusted net debt/EBITDA 7.8 6.4 3.3 2.3 1.2
EBITDA/interest 1.3 2.1 2.4 2.9 5.7
Source: Company, Fitch

2012 Outlook: Indian Edible Oils 6

January 2012
 Corporates

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2012 Outlook: Indian Edible Oils 7

January 2012