CRISIL Ratings noted improved operating margins and stable credit profiles, with government policies supporting profitability through extended zero import-duty measures.
For domestic refiners of edible palm oil, revenue is expected to grow 10 per cent this fiscal on steady demand and higher realisations. Operating profitability is seen rising 40-50 basis points (bps) to 3.5 per cent owing to favourable prices and continuation of duty-free imports.
Healthy balance sheets and the absence of major debt-funded capital expenditure (capex), over the medium term, will keep the credit risk profiles of palm oil refiners stable. A study of nine companies rated by CRISIL Ratings, accounting for a third of the industry revenue of Rs 75,000 crore, indicates as much.
Palm oil dominates edible oil consumption in India, with 38-40 per cent share in volume. Palm oil is used largely in the food processing and hotels, restaurants and catering (HoReCa) segments, which account for 45-50 per cent of the overall consumption. The household and industrial segments consume the rest.
Rising urbanisation and increased consumption of processed and outside food will keep palm oil demand firm. Hence, the industry is set to witness volume growth of 3-4 per cent this fiscal to 93 lakh tonnes.
India has ample refining capacities but does not produce much crude palm oil (CPO) to feed the refineries and is dependent on the world’s largest producers — Malaysia and Indonesia — for over 90 per cent of its CPO requirement. Over the years, the global palm acreage has stagnated owing to sustainability and environmental concerns, ultimately leading to price rise.
Rahul Guha, Director, CRISIL Ratings said, “In the latest budget, the Government’s endeavour to strengthen the domestic production of oil seeds to support domestic availability was amply clear, but the outcome could be little long drawn. In the meantime, global CPO output is expected to remain stagnant at 78-79 million tonnes, leading to price rise of 7-8 per cent this fiscal. Along with steady volume increase, this will lead to Indian edible palm oil industry revenues rising 10 per cent this fiscal.”
The operating margins of Indian refiners are set to improve 50 bps to 3.5 per cent on account of increased economies of scale, firm commodity hedging policies and continuation of duty-free imports of CPO.
Says Rishi Hari, Associate Director, CRISIL Ratings, “In fiscal 2023, the Government of India had extended the zero import-duty structure for CPO for two straight years until March 2025. The duty structure was earlier set to expire in March 2024. The import duty for CPO was as high as 40% pre-pandemic. The extension will help regulate domestic supplies and keep prices in check, whilst supporting profitability this fiscal.”
Amid stagnant global supplies, Indian refiners are unlikely to add capacities over the medium term, and cash accrual will be more than adequate to cover incremental working capital requirement and maintenance capex. Hence, credit profiles will remain stable this fiscal, with total outside liabilities to tangible networth (TOLTNW) and interest coverage ratios estimated at 1.25 times and 4 times, respectively. That said, the impact of geopolitical challenges and international edible oil trade dynamics will bear watching.
