Industry Risk Score : Rice Mills

Executive Summary

Rice is the staple diet of population globally. India is the second largest producer of rice after China and the largest exporter in the world. Rice production in India increased at 1.43% CAGR during FY03-FY18. Rice production in FY2017-18, at 111 million tonne (MT), constituted 40% of the total food grain production of 278 MT in the country. India’s total cereal export stood at Rs. 56,259 crores, with rice exports at Rs. 54,061 crores (96.1 %).

Rice grown in India can be broadly categorised 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 expected to reach Rs. 28,000 crore in FY 2018-19 due to its rising international demand. Its domestic market is also on an upward swing due to rising affluence and shift in customer preference towards branded products. 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.

Government’s focus on agriculture and allied sector, tax incentives, increased fund allocation to agro and food processing industry and higher spending on farmer welfare schemes would give a tremendous boost to the industry. Union Budget 2018-19 aims to double India’s share in world agro exports from USD 30 billion to USD 100 billion by 2020 and is working on a comprehensive agricultural export policy towards infrastructure and logistic development, stable trade policy and promoting research and development in the industry.

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 strong fundamentals of the rice millers. The industry faces high inventory related risks as rice stocks have to be maintained at significant levels for ageing purposes. Rice crop 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.

The rice market, especially the non-basmati segment is largely unorganised and unbranded, with low entry barriers. Stiff competition exists in both domestic and international markets, and companies aggressively focus on brand building through organised retail and marketing, especially in the basmati category. Basmati exports, however, are exposed to lower competition risk since it is a Geographical Indication (GI) product, with production concentrated only in India and Pakistan region.

Acuité believes that the overall risk to the sector is moderate. Despite high demand for unique Indian basmati varieties, the profitability remains an area of concern due to volatile international prices and uncertainties in trading policies. Other key risks are MSP imposed by the government (non-basmati segment) and trading policies and restrictions imposed by the importing countries. The competitive risk, especially in the non-basmati segments, will continue to remain high given the low entry barriers and large number of players. However, the rising penetration of organised retail and increasing customer awareness, in the case of basmati rice, is paving the way for better command on pricing in the long term.

Key Risks & Attributes

  • Fluctuations in and regulation of raw material (paddy) supply and prices
  • High inventory carrying cost and working capital cost
  • High competitive intensity due to low entry barriers in the non-basmati segment
  • Trade policy of importers
  • Foreign exchange risk
  • Agro-climatic conditions

Demand & Supply Scenario


Rice production in India accounts for 40% of total food grain production and most of it is consumed within the country. Rice production during FY 2017-18 was 111 MT as against 110 MT in FY 2016-17, depicting an annual increase of about 1.2%. The agriculture ministry aims to increase rice production further to 113 MT in FY 2018-19.

More than 4,000 varieties of rice are grown in India to meet diversified consumer demand. 40-45% of the produce is retained by farmers for their own consumption and seed use. Of the balance, common coarse variety, which is most widely eaten in the country, is mandatorily procured by the government to ensure food security under the Public Distribution system (PDS). Rice millers procure the rest for marketing to consumers. 90% of rice grown is non-basmati variety, which witnesses stable domestic demand being the staple food for majority Indians. Rice mill players also earn revenue from sale of by-products such as bran and rice bran oil.

Non-Basmati Rice varieties are mainly exported to Nepal, Benin, Senegal, and other African nations. In FY 2017-18, India exported 8.6 MT of non-basmati rice worth Rs. 22,000 crore as against 6.8 MT worth Rs. 17,000 crore in FY 2016-17, an annual increase of 35% in value terms. Non-basmati rice faces stiff competition from other rice exporters, primarily Thailand and Vietnam. Moreover, the export of non-basmati rice is susceptible to changes in government policies. Rice exports can be banned during periods of food shortage. A recent instance being ban on exports of non-basmati rice from India in FY08–FY12 period.

In India, 29 varieties of basmati have been notified under the Seeds Act, 1999. Majority of the basmati production is exported mainly to Iran, Saudi Arabia, United Arab Emirates and Iraq. Basmati, known for its aroma and texture, is produced largely in India and Pakistan and faces little competition from other fragrant rice varieties from other countries. During FY 2017-18, basmati exports stood at 4 MT worth Rs. 26,000 crore, and the sector witnessed a revival with 22% growth in value due to 23% growth in average realisation in 9M FY 2017-18 (Rs. 64,594/MT in 9M FY 2017-18 as against Rs. 53,985/MT in 9M FY2016-17). Domestic demand for basmati is also growing at a healthy rate on the back of rising income and shift in consumer preference towards good-quality branded rice products.

Consumption pattern, quality benchmarks, socio-economic-political conditions and trade policies of the importing countries have a bearing on export demand. As a result, rice mills, which are largely dependent on exports, face volatile demand and stock liquidation challenges and are vulnerable to currency fluctuations. Temporary ban on basmati exports from India imposed by Iran (the largest importer of rice from India) from August 2017 to January 2018, adversely impacted the industry.

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, and damages caused by poor storage facilities.

Acuité believes that demand risk to the sector is moderate; 90% of rice grown in India is non-basmati variety, which witnesses stable domestic demand being the staple food for majority Indians. Growing demand for the unique Indian basmati varieties in the international market shall continue to benefit the industry in FY 2018-19. However, profitability may be an area of concern due to volatile international prices and uncertainties in trading policies.

Nature & Extent of Competition


In India, rice sales are largely unbranded in nature. The unbranded unorganised sector accounts for around 60% market share. However, the rising penetration of organised retail and increasing customer awareness have forced players to turn their attention towards establishing brands. This is true especially in the case of basmati rice, which enjoys a premium position in the rice industry. Brand development allows for differentiation in a commoditised industry, and hence paves the way for better command on pricing in the long term.

KRBL Ltd. (India Gate brand), LT Foods (Daawat, Royal brands), and Kohinoor Foods (Kohinoor, Charminar brands) are some of the leading names in branded basmati. KRBL is the world’s largest miller and exporter of basmati rice. It commands 32% share in organised retail and is a market leader in basmati exports. It is followed by LT Foods, which occupies 22% share in the branded rice market.

Entry barriers are huge for new basmati entrants due to high working capital requirement and stiff competition from known brands. Reputed companies with established contract farming and paddy procurement relationships, wide distribution networks and state-of-the-art manufacturing facilities, have competitive advantage over smaller and less organised players.

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 characterised 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 standardised equipment, low skilled manpower requirement, easy availability of raw material and steady demand characterise 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 high given the low entry barriers and large number of players. However, in the case of basmati rice, the rising penetration of organised retail and increasing customer awareness, is paving the way for better command on pricing in the long term.

Input Related Risk


Rice is sown during the rain-fed kharif season (April-October) and its production is monsoon-dependant. Raw paddy is procured from farmers at or above government-declared MSP and directly milled or parboiled before milling to produce semi-finished or finished rice. Paddy accounts for about 88-90% of the overall cost of rice milling. The MSP for paddy has increased at a CAGR of 3.42% over FY14-FY18 impacting millers’ margins.

Paddy output is contingent on agro-climatic conditions, crop acreage and farmer’s varying crop preference. During periods of deficit rainfall, paddy production declines, leading to escalation in prices. Farmers also tend to change cropping pattern in anticipation of market demand and prices of various farm produce. This is often experienced in the basmati category as it is under smaller proportion of cultivation area. For non-basmati rice, stable demand ensures that it is rarely exposed to such cultivation variations.

West Bengal, Punjab, Haryana and Uttar Pradesh are the major rice producing states, but production levels vary widely across states depending upon irrigation facilities and farming techniques.

The industry 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 also face logistic concerns over transportation, proper handling (temperature, humidity, breakage) and pest-free storage of paddy. Moreover, fluctuation in paddy prices may result in inventory loss in case of significant market correction.

The government announced allocation of Agro-Market Infrastructure Fund of Rs. 2,000 crore in Union Budget 2018-19, which is expected to assist farmers in developing market for their produce. The Operation Green scheme has been allocated Rs. 500 crore to address price volatility issues and improve processing and agro-logistics. Development of regulated trading and exchange centres may enable farmers, even those at remote locations, to have direct access to market without market intermediaries. It may enable the produce to move rapidly and efficiently from farm gate to processing facilities, thus improving overall supply chain. As a result, Rice mills should be able to source paddy from any mandi in India thereby reducing inter-mediation cost.

Acuité believes that the input risk to the sector remains moderate in overall lack of storage and transportation infrastructure. In the short term, it is expected to be balanced favourably in light of normal monsoon in FY 2018-19.

Regulatory Risk


The basmati sector has very limited government intervention, but the market supply and pricing of non-basmati category is closely monitored. 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.

Non-basmati exports were banned during 2008-2012 due to food crisis and future trading in rice was also banned in September 2007 due to price inflation and speculation concerns. At present, no trading or export restrictions exist on rice.

The exporting rice mills, mostly in the basmati segment, have to comply with stringent pest and hygiene related controls from importing countries. During 2016, China, the world’s leading importer of rice, inspected 19 registered trade mills and allowed non-basmati exports from 14 of them after ensuring strict adherence to quality, health and safety standards. Saudi Arabia has made it compulsory to mention supplier-related information on rice bags as a quality protocol. Similarly, since 2018, the European Union does not allow rice imports exceeding the maximum fungicides residue level of 1.0 mg/kg. Exports worth Rs. 1,700 crore shall be hit as around two crop cycles are needed to implement this norm.

Imposition of Goods and Services Tax (GST) @5% on branded cereals, which include rice brands registered under the Trade Marks Act, 1999, is expected to impact profitability of registered branded rice suppliers compared with the unbranded ones. Earlier, they were under value added tax or were tax-free in some states. Some players selling established brands, but not registered under the said Act, may gain some short-term structural advantage. Some uncertainty regarding taxation on sales of bran, a prominent by-product of the industry, presents some concern.

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.

Industry realisations improved in FY 2017-18 as government banned exports against document of acceptance (DA, a credit arrangement, which allows export of consignment without settling payment). Exports through DA witnessed delay/default in payments and price manipulation by importers. The industry is demanding a ban on DA-routed non-basmati exports and also blacklisting of overseas firms that had blocked payments, causing heavy losses.

The Union government is working on a draft agricultural export policy aiming for more stable trade policy structure, standardised mandi fee structure, reforms for the Agricultural Produce Market Committee and liberalised land-leasing norms. In Union Budget 2018-19, allocation of funds to the food processing industry has been doubled to Rs. 1,400 crore. Other supportive announcements included higher allocation to the interest allocation scheme and tax exemption to farmer producer companies.

Acuité believes that the regulatory risk remains moderate due to MSP imposed by the government, trading policies and restrictions imposed by the importing countries balanced by favourable government initiatives towards the industry.

Technology Risk


Rice mill industry, especially the non-basmati segment, is characterised by low technical intensity with largely standardised equipment and low skilled manpower requirement. Hence, overall technology risk remains low. However, the basmati segment needs robust 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 to moderate, mostly driven by the quality norms imposed by the importing markets.

Key Risks & Attributes

Turnover growth and profitability of players in the rice mill industry depend on their positioning in the value chain, which comprises:

  • Millers (converting paddy to semi-processed rice),
  • Processors (converting semi-processed rice to finished rice),
  • Integrated players (processing paddy to finished rice, along with production of by-products such as bran oil extraction and captive power generation)
  • Traders

Operating Margin


The operating margin of the industry is relatively low. The median operating margin stood at 5.4% in FY 2016-17. The EBITDA margin dropped from 7.1% in FY 2014-15 to 2.23% in FY 2016-17. Dependence on agricultural climatic conditions, volatility in raw material/ input costs/ working capital costs and high competition are the key variables.

Interest Coverage


Interest coverage declined from 1.41 times in FY 2014-15 to 0.66 times in FY 2016-17. Median interest coverage ratio during FY 2014-15 to FY 2016-17 was 1.13 times.

Return on Capital Employed


The industry’s RoCE remained severely stressed with negative 4.3% in FY 2016-17. During FY15- FY17, the average RoCE was 0.1%. RoCE of rice mill companies is impacted by the high inventory carrying and working capital cycle costs.

Debt / Equity


The rice mill industry had a high debt-equity ratio with an average of 2.18 times during FY15-FY17. The industry median improved to 0.44 times in FY 2016-17.



The industry presented a moderately unfavourable liquidity profile in terms of gross current assets with an average of 235 days for FY15-FY17. For FY 2016-17, the median GCA was 222 days.

Industry Financials and Industry Average

Fact Sheet (As on Year Ended March 31st)SUM Unit 201703 201603 201503
Net Sales Rs. Cr. 12,115 13,635 13,267
OPBDIT (Excl. NOI) Rs. Cr 286 588 1,216
Depreciation Rs. Cr. 177 176 175
PAT Rs. Cr. (602) (203) 327
Net Cash Accruals Rs. Cr. (426) (27) 502
Networth Rs. Cr. 2,276 2,820 3,137
Total Debt Rs. Cr. 6,655 6,743 6,753

Average Unit 201703 201603 201503
EBITDA Margin % 2.23 6.88 7.07
PAT Margin % -3.69 0.69 1.47
ROCE % -4.29 2.10 2.58
Interest Coverage Times 0.66 1.33 1.41
Debt to Equity Times 0.44 2.81 3.29
GCA Days Days -0.78 4.20 6.88

The entities considered in the static pool are as under:

  1. Amir Chand Jagdish Kumar (Exports) Ltd.
  2. Chaman Lal Setia Exports Ltd.
  3. KRBL Ltd.
  4. Kohinoor Foods Ltd.
  5. LT Foods Ltd.
  6. SSA International Ltd.
  7. Santosh Overseas Ltd.
  8. Sunstar Overseas Ltd.
  9. Tara Chand Rice Mills Pvt. Ltd.
  10. Usher Agro Ltd.

IRS Definitions

Acuité Industry Risk Scores are assigned on a six-point scale, with 1 indicating ‘High Risk’ and 6 indicating ‘Highest Safety’. The intermediate scores are defined in the table below:

Industry Risk Score Risk classification of the Industry
ACUITE IRS 1 Highly Unfavourable
ACUITE IRS 2 Unfavourable
ACUITE IRS 3 Neutral
ACUITE IRS 4 Marginally Favourable
ACUITE IRS 5 Favourable
ACUITE IRS 6 Highly Favourable


Acuité IRS should not be treated as a recommendation or opinion that is intended to substitute for a financial adviser's or investor's independent assessment of whether to buy, sell or hold any security of any entity forming part of the industry. Acuité IRS is based on the publicly available data and information and obtained from sources we consider reliable. Although reasonable care has been taken to ensure that the data and information is true, Acuité, in particular, makes no representation or warranty, expressed or implied with respect to the adequacy, accuracy or completeness of the information relied upon. Acuité is not responsible for any errors or omissions and especially states that it has no financial liability whatsoever for any direct, indirect or consequential loss of any kind arising from the use of Acuité IRS.

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