Industry Risk Score : Edible Oil

Executive Summary

A variety of edible oils are manufactured and consumed all over the world, viz., palm oil, soybean oil, sunflower oil, olive oil and mustard oil, to name a few. Parts of plants including seeds, nuts or flesh of fruits are cold or hot pressed to extract edible oils. These oils are used for cooking including frying or as dressings. Some oils are used in hair care, manufacture of soaps, cosmetics, and detergents, and for industrial purposes.

Globally, the production of edible oils has witnessed a consistent growth. It stood at 185.75 million tons in FY 2016-17, with palm oil accounting for 65.5 million metric tons1. Malaysia and Indonesia are the major producers of palm oil, whereas China and the United States of America (USA) produce soybean oil. Given their population, India and China are major importers of edible oils, even though they are one of the largest producers of edible oil as well. The European Union and USA, being major importers of edible oil, steer the global demand.

In India, demand for branded edible oils is consistently on a rise. However, the production of edible oil has not substantially increased, and the shortfall is met by imports. Per hectare oilseed yield continues to be low due to poor quality seeds, inadequate irrigation facilities, and use of redundant technology for oil extraction and refining. Though the government has taken several initiatives such as minimum support price for certain oilseeds, National Oilseed Development Project and Oilseed Production Programme, its efforts have not yielded the desired results.

Key Risks & Attributes

  • Dependence on imports to meet the ever-growing demand for edible oil
  • Each branded oil has its own niche market and controls prices to a certain extent
  • Low productivity of oil seeds due to poor farming practices and dependence on climate
  • Use of obsolete methods for extraction and refining of oil
  • Forex fluctuation risk in imports



Demand & Supply Scenario

4/6

In FY 2016-17, the Indian packaged food market was approximately Rs. 434,000 crores. Edible oil was the largest category and constituted 30% of the market1. The demand for edible oils is expected to reach 29 million tons in FY 2021-22 and 34 million tons by FY 2029-30, from 24 million tons in FY 2016-172. This is largely due to growing population, awareness about the health benefits of branded edible oils, and urbanisation, and better living standards. The demand for edible oils is met through domestic production and imports.

There has been a constant change in the consumption pattern of edible oils. In the pre-liberalisation era, the market was flooded with loose oil and vanaspati manufactured by the unorganised sector. But with growing awareness about the adverse effects of these oils on health, consumers shifted to branded edible oils. The demand for branded oils also increased due to increase in population and urbanisation, improvement in living standards, and dining out becoming popular.

Palm oil has captured almost 45% of the packaged and branded edible oil market3. It has a variety of uses other than cooking, viz., hair care and manufacturing of soaps, cosmetics, detergents, among others. There is also demand for special oils that specifically benefit diabetic or heart patients. Demand for edible oils is met by locally produced edible oils and imports. Imports, largely from Malaysia, Indonesia, Brazil and Argentina, constitute more than 60% of the oil consumed4. This has put tremendous pressure on our forex reserves. Further, crop failure in Malaysia or Indonesia will lead to acute shortage of edible oil and also increase the cost of imported oil.

Acuité believes that the growth in demand for edible oils will continue to increase at a steady pace. However, India is substantially dependent on imports to meet its demand, which makes its trade balance unfavourable.

Nature & Extent of Competition

4/6

Edible oils have their own distinct properties and do not compete with each other for market share. The market consists of many players, both in the organised and unorganised sectors. There are many imported brands as well, but each brand offers a differentiated product and has its own niche market.

A variety of oils are used across India. Each oil has its own distinct properties, flavour, aroma and usage. Each region in India has its own preference for cooking oil. Northern India prefers mustard oil and soybean oil, whereas southern India prefers groundnut oil, sunflower oil and palm oil. Apart from edible oils, desi ghee and vanaspati are also used in Indian cooking. But they are not massive competitors to edible oils. Ghee is more expensive than most edible oils and is mostly used for making Indian sweets. Vanaspati is a cheaper version of ghee and is becoming unpopular because of the health risks it poses.

The edible oil market is fragmented with large number players in both the organised and unorganised markets. The organised edible oil market is flooded with many branded oils, both domestically produced and imported. Fortune, Saffola and Sundrop have captured most of the cooking oil market. Fortune makes sunflower, soya refined, mustard and olive oil. Saffola sells blended oil made from rice bran oil and soybean oil. Sundrop is into refined rice bran oil. These oils are distinct from each other in terms of pricing, health benefits, aroma, and usage and target different customer segments and dominate their niche market.

Palm oil, imported from Malaysia and Indonesia, is mainly used in processed food and sweets, and manufacture of non-food product such as soap, cosmetics, and detergents. Oil imported from Australia is low-cholesterol oil and has managed to capture a respectable market share. Olive oil has also become very popular for use in salad dressings, stir frying, marinating and roasting. It is also used for hair care and skin care. The market is flooded with several brands, mostly from Italy and Spain.

Further, since the products are differentiated, they have moderate control over the prices. However, if prices of imported oil fall substantially, it can pose a real threat to the domestically produced oils.

Acuité believes that since the Indian market is dominated by a few players, new entrants need to sell differentiated products to carve a niche in the market.

Input Related Risk

2/6

India is a major producer of oil seeds such as groundnuts, mustard seeds, and sesame seeds. Production of oil seeds has been consistently low as land under cultivation has remained stagnant, and on account of lack of irrigation, poor farming practices, threat from pests, availability of cheap imported oil and lack of warehousing facilities. Further, method of extraction and refining of edible oil continues to be outdated and inefficient.

The challenges in cultivation of oilseeds are:

  1. Land under cultivation of oilseeds has increased only marginally over the years as farmers prefer high-yielding crops such as wheat and rice, or give up their land for non-food grain use. Further, most of the oilseed crops such as palm oil have a gestation period of 3-7 years, which discourages new farmers from growing oil seeds or increasing the land under cultivation for oilseeds.
  2. Only 25% of the land used for cultivation of oil seeds is irrigated; the remaining is dependent on erratic rains.
  3. The production per hectare is also low due to inferior quality seeds, poor soil and mediocre farming practices. About 85% of the farmers growing oil seeds have no resources to improve cultivation.
  4. Rise in temperature allows various pests to survive, which earlier did not survive in colder climate. These pests are a threat to the production of oilseeds.
  5. Growing oilseeds is not remunerative for farmers as many imported cheap oils are available. They are vulnerable to fluctuations in global prices of oilseeds.
  6. Warehousing facilities are not available for storage for oilseeds as well as imported oil, increasing the prices of existing facilities.

Processing of oil is undertaken by small scale industries and they use redundant technology to extract oil leading to low yields. They also have set up large capacities for extraction and refining of crude oil as they were given incentives by the government. But the excess capacities remained unutilised as the production of oilseeds and import of crude oil was not sufficient to fully utilise them.

Acuité is of the opinion that input related risks are substantially high and are detrimental to the edible oil industry. Concrete steps need to be taken to increase the production of oil seeds and modernise the process of refinement of oil, to enhance the domestic production of edible oil.

Regulatory Risk

5/6

The Government of India has put in place a number of tax and non-tax regulations to promote the domestic edible oil industry.

100% FDI has been allowed in the edible oil sector with the aim of infusing fresh capital and technology into the industry and boost production.

Recently, import duty on crude edible oils such as groundnut oil, olive oil, and sunflower oil, has been raised from 12.5% to 30%. Import duty on refined oils such as soybean oil and olive oil has also been increased from 20% to 35%. Further, the import duty on crude palm oil has been raised to 44% from 30% and that on refined palmolein, to 54% from 40%, from March 1, 2018. This was done with a view to support the locally produced edible oils.

Goods and Services Tax on edible oils has been pegged at 5% compared with earlier tax of 6-7%. The government has put in place the minimum support price for various crops including oil seeds. Under this scheme, the government purchases oils seeds from farmers at a particular price in case they are unable to sell at a higher price. But the scheme was not implemented in entirety. The government agencies mainly focus on purchase of wheat and rice as they had inefficient resources available for procurement. In some cases, they put a cap of 25% of oilseeds harvested by a farmer.

Acuité believes that with favourable government policies, the domestic manufacturers of edible oil will get a competitive edge over imported oil. The industry will also benefit from capital and technology that will be brought in by foreign players.

Technology Risk

3/6

The Government of India has launched many projects such as the National Oilseed Development Project and Oilseed Production Programme, to address the issue of low per hectare productivity of oil seeds, by using new hybrid seeds, introducing new methods for irrigation and improvement of soil, among others. However, there has not been substantial increase in per hectare production of oilseeds. Oil processing companies have also failed to modernise the process of oil extraction and refining.

Acuité believes that use of obsolete technology for production of oil seeds and extraction of oil is a huge risk for the industry, leading to inefficient utilisation of resources, increasing costs and low profitability.

Operating Margin

4/6

In terms of net sales, the Edible Oil industry witnessed a decreasing trend and Y-o-Y marginally decrease of 0.32% during FY2017-FY18 and an average yearly decrease of 22.7% during FY16-18, whereas Operating Margin has been consistently growing during the last three years. Industry witnessed growth in the operating margins from 7% in FY 2015-16 to 15% in FY 2017-18, reflecting a marginally favourable position. Average Operating Margin for three years from FY 2016 to FY 2018 was reported as 11%.



Interest Coverage

6/6

Overall interest expense has reduced Y-o-Y between FY 2016 and FY 2018, resulting in improved average interest coverage ratio at 6.7 times in FY 2017-18 compared to 2.9 times in FY 2015-16. Average industry interest coverage ratio was reported as Highly Favourable at 4.58 times during FY 16-18.



Return on Capital Employed

2/6

Industry ROCE remained unfavourable during the period FY 16-18 as the average ROCE for the three-year period was reported as 7%. However, improving PAT margins signifies a healthy recovery of the industry as the industry ROCE was reported as 10% in FY 2017-18, 7% in FY 2016-17, and 4% in FY 2015-16.



Debt / Equity

6/6

The industry showed a stable and highly favourable debt-equity ratio with an average of 0.7 times, during the three-year period. Debt-Equity ratio has improved in FY 2017-18 and was reported as 0.6 times compared to 0.7 times in FY 2016-17.



Gross Current Assets

5/6

Though gross current assets (GCA) remained favourable during FY 16-18, the industry presented a concerning trend in terms of GCA increasing from 70 days in FY2015-16 to 109 days in FY2017-18. The industry had an average GCA of 89 days, during the three-year period.



Industry Financials and Industry Average

Fact Sheet (As on Year Ended March 31st)SUM Unit 201803 201703 201603
Net Sales Rs. Cr. 15,078 15,126 27,604
OPBDIT (Excl. NOI) Rs. Cr. 2,293 2,046 1,931
Depreciation Rs. Cr. 273 250 321
PAT Rs. Cr. 1,097 774 434
Net Cash Accruals Rs. Cr. 1,371 1,025 755
Networth Rs. Cr. 6,348 5,973 6,909
Total Debt Rs. Cr. 3,870 4,396 4,702


Average Unit 201803 201703 201603
EBITDA Margin % 15% 14% 7%
PAT Margin % 7% 5% 2%
ROCE % 10% 7% 4%
Interest Coverage Times 6.7 5.7 2.9
Debt to Equity Times 0.6 0.7 0.7
Debt to EBITDA Times 1.7 2.1 2.4
GCA Days Days 109 105 70


The entities considered in the static pool are as under:

A V T Natural Products Ltd.
Agro Tech Foods Ltd.
Anik Industries Ltd.
Bunge India Pvt. Ltd.
Godrej Industries Ltd.
Gokul Refoils & Solvent Ltd.
Gujarat Ambuja Exports Ltd.
J R Foods Ltd.
K S E Ltd.
Kriti Nutrients Ltd.
Marico Ltd.
Modi Naturals Ltd.
N K Industries Ltd.
Rasoya Proteins Ltd.
Ruchi Infrastructure Ltd.
Sam Industries Ltd.
Vegetable Products Ltd.
Vimal Oil & Foods Ltd.


Disclaimer:

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.

Our exciting journey started in 2005 with rating of bank borrowers most of whom were small and medium enterprises. At that time, credit rating was a concept known only to large issuers of capital market instruments. Since then, like a caterpillar transforms itself into a beautiful butterfly, we transformed to rate bonds, bank facilities of large corporates and issuers across industries. Along came many achievements - SEBI Registration in 2011, RBI accreditation in 2012, 50,000 ratings in 2018, 5,000 Bond and Bank Loan Ratings in 2017, launch of India's first Android and iPhone app to disseminate rating, tamper-proof QR-code-enabled rating rationales, and SMERA Terminal to name a few.

Now is the time to re-emphasize our increasing footprint across all segments of ratings through the launch of our new name - 'Acuité'.

The name has changed. The spirit of upholding highest standards of analytical rigour, continuous improvement, excellence in our processes and quest for innovation remains the same. We would like to re-emphasize that we will continue to work hard to provide independent, unbiased and timely opinion of highest standard.

Acuité means 'sharpness and clarity of thought and vision'. Let our research and ratings help you take decisions with confidence.


Sankar Chakraborti
CEO