Industry Risk Score : Rice Mills

Being considered as a staple food, majority of rice is produced in Asia and India accounts as the second largest producer of the rice contributing around 21% to the global production. Rice production in India has increased at a CAGR of ~2% during FY15- FY19. The production, in fact, rose by ~3% y-o-y to ~116 million tonnes (MT) in FY19 from 112.8 MT in FY18. Major rice producing states in India include West Bengal, Uttar Pradesh, Andhra Pradesh, Punjab, Tamil Nadu, Odisha, and Bihar. Further, India is also the largest rice exporter in the world with overall export of 120.1 lakh MT in FY19.

Rice grown in India can be broadly categorized as basmati and non-basmati. Indian basmati, being one of the finest rice in the world, is exported to more than 100 countries, and the market is further expected to expand with rising international demand. Furthermore, domestic market too is on an uptrend due to rising affluence and shift in customer preference towards branded products. On the other hand, there is stable demand for non-basmati rice from both domestic and international markets. The demand for the same is also closely monitored by the government to ensure food security in the country.

Rice mills are price takers as procurement of paddy is at government-fixed minimum support price (MSP) and thus, operational and logistics efficiencies are critical to ensure profitability. The industry has high inventory level as rice stocks have to be maintained at high levels. Rice crop further witnesses supply and price variations due to high dependence on monsoon, inadequate irrigation facilities, outbreak of crop diseases, obsolete farming techniques and farmers’ varying crop preferences. Exports are also subjected to variations in economic conditions and trade policies of importing nations and their stringent quality and hygiene standards. Further, the rice market, especially the non-basmati segment is largely unorganized and unbranded, with low entry barriers leading to stiff competition.

Key Risks & Attributes

• Issues related to paddy supply and prices
• High reliance on climatic conditions which can affect the availability of paddy
• High competitive intensity due to low entry barriers
• Government policy interventions w.r.t MS

Rice production in India stood at ~116 MT in FY19 as compared to 112.9 MT in FY18 (~3% y-o-y growth), contributing ~40% to the overall food grain output of ~284 MT in FY19. The country also has the largest area under rice cultivation with about 438 lakh hectares.

India is also one of the world’s largest exporter with the overall export of 120.1 lakh MT in FY19. In fact, as per the latest data compiled by the Agriculture & Processed Food Products Export Development Authority (APEDA), India’s export of basmati rice has increased to 8.6 lakh MT during Apr-May 2019 as compared to 7.4 lakh MT for the corresponding period of the previous year. However, country’s overall non-basmati rice exports, plunged by 50% to 7.1 lakh MT during Apr-May 2019 as compared to the 14.3 lakh MT in the same period of last year. Imports on the other hand, of non-basmati rice witnessed a rise in FY19 as well.

Consumption pattern, quality benchmarks, socio-economic-political conditions and trade policies of the importing countries have a bearing on export demand. Export demand for non-basmati rice mostly is affected due to the increase in the minimum support price (MSP) of paddy which makes the Indian non-basmati rice expensive in the world market.

On the supply side, rice production remains highly dependent on monsoon and faces agricultural risks such as outbreak of diseases, which could lead to variance from the projected production levels impacting supply and hence prices. The sector is also exposed to damages caused by poor storage facilities.

Acuité believes that the demand-supply risk persists in the sector owing to its high dependence on climatic conditions.

The rice industry is highly competitive, as in addition to the presence of established players the industry faces competition with the fragmented smaller players in the unorganised sector. In India, unorganised sector catering to the rice industry accounts for ~60% market share.

However, rising penetration of organised retail and increasing customer awareness have led players towards establishing their brands. Further, brand development allows a differentiating factor in the commoditised industry which has limited value additive nature, and hence paves the way for better command on pricing in the long term.

The market is mostly dominated by the companies like KRBL Ltd. (India Gate brand), LT foods (Dawat Royal brands), and Kohinoor Foods (Kohinoor, Charminar brands). With production capacity of 195 tonne per hour (TPH), which is largest in the industry, makes KRBL ltd. one of the world’s largest miller and exporter of basmati rice. It contributed ~35% market share in the branded basmati rice segment, followed by LT Foods (~22%). Most of the basmati players in the organised sector have an integrated business model and also have strong relationship with the local farmers through contract farming, which helps in terms of paddy procurement. Consequently, with the strong hold in paddy procurement and improved manufacturing facilities organised players have maintained robust profile in these segment which makes difficult to new entrants to build strong hold on the market in short time. However, the low capex and technical complexity provides low entry barriers, resulting in the presence of a large number of small-to-medium scale enterprises impacting profitability.

Although the basmati category faces tough competition in the domestic market, Pakistan is the only competitor internationally and India enjoys an edge over it due to high production and superior quality of the aromatic product.

The non-basmati segment is characterized by high competition as low entry barriers have led to numerous industry players, both in domestic as well as the export markets. Low upfront capital investment requirements, low technical intensity with largely standardized equipment, low skilled manpower requirement, and steady demand characterize the segment. The main export competitors in this category are Thailand and Vietnam.

Acuité believes that the competitive risk, especially in the non-basmati segments, will continue to remain given the low entry barriers and large number of players.

Rice is sown during the kharif season (April-October) and its production is thereby dependent on monsoon. Raw paddy is procured from farmers at or above government-declared MSP and directly milled to produce rice. Paddy accounts for about 88-90% of the overall cost of rice milling. Consequently, availability of the same remains highly critical. The MSP of paddy has increased at a CAGR of 5% over FY15-FY19. Further, the government has raised the MSP of paddy by 3.7 per cent to Rs. 1,815 per quintal for the 2019-20 crop season.

The industry also faces high working capital requirement, inventory carrying costs and interest costs. Being a seasonal crop, huge stocks of paddy have to be procured and stored for a long period. Carrying costs are also high as huge stocks have to be maintained for ageing purposes. Companies face logistic concerns too, over transportation, proper handling and pest-free storage of paddy.

Acuité believes that the sector remains vulnerable to input risk as any adverse climatic changes might lead to a shortfall in paddy production which can confine supply.

The market dynamics of non-basmati rice are closely monitored by the government. Non-basmati rice is procured by government under the PDS at levy prices (sum total of MSP and milling cost). Rice mills have to first supply a fixed proportion of custom-milled rice as per respective state government’s requirement to the Food Corporation of India before entering the open market. This impacts the profitability of rice mills. The basmati sector however, has very limited government intervention.

Although the implementation of GST has helped the sector by streamlining various state levies, disparity in mandi tax and market fee is a cause of worry for millers in various states. For instance, increase in market and rural development fee from 2% to 3% in FY18 has put Punjab based millers, a prominent segment of the industry, in a less competitive position than their counterparts from adjoining states where the mills set under mega project category are exempt from local levies for first ten years.

Notwithstanding, in order to support the industry GOI has also introduced new schemes such as Pradhan Mantri Gram Sinchai Yojana, Paramparagat Krishi Vikas Yojana,

Moreover, players catering to the export market are closely monitored and are exposed to the regulations prevalent in the respective geographies. Regulatory challenges that surfaced during FY19 were pesticide residue issue leading to a decline in exports to European Union (EU), Saudi Arabia mulling adoption of stringent pesticide rules, payment issues from some Iranian importers and uncertainty due to imposition of trade sanctions on Iran by the US Government. The stringent pesticide norms by EU led to loss of exports worth around Rs. 1,000 crore in 9M FY19, and the same could exacerbate going forward.

Acuité believes that there exists high regulatory risk due to the government policies and restrictions imposed by the importing countries.

Rice mill industry, especially the non-basmati segment, is characterized by low technical changes with largely standardized equipment and low skilled manpower requirement. Hence, overall technology risk remains low. However, the basmati segment needs research and development to develop efficient milling techniques and reduce wastage. Biotechnology research is also being undertaken by private companies to develop transgenic varieties having high resistance to diseases and pests, aiming to improve rice yield and quality.

Acuité believes that technology risk to the sector is low, mostly driven by the quality norms imposed by the importing markets.

Industry financial performance risk score

Operating Margin
(Marginally favorable)

Interest Coverage Ratio
(Marginally favorable)

Return on capital employed
(Marginally unfavorable)

Debt/ Equity
(Marginally favorable)

GCA days
(Unfavorable)

Note: The industry financial performance risk score is provided on a 6-point scale