India Ratings Revises Edible Oil Sector Outlook to Negative to Stable from Negative

Mumbai, April 11, 2014: India Ratings & Research (Ind-Ra) has revised its FY15 outlook to negative to stable from negative for the edible oil sector and the companies within the sector. Ind-Ra expects the increase in the import duty on refined oils to 10% from 7.5% in January 2014 to result in crude edible oil becoming less expensive than refined oil even after factoring refinery costs, thereby making refining economically viable. This in turn is expected to improve the operating profitability of most edible oil companies engaged in refinery and high-sea sales.
The improvement in operating profitability is expected to offset the higher working capital requirements faced by most edible oil companies and result in improved operating cash flows. Players with negligible capex commitments are expected to witness an improvement in credit profile as compared to players with non-deferrable and higher capex commitments who may continue to witness strained free cash flows resulting in additional debt drawdowns and credit profiles remaining similar to FY14 levels. According to Industry Analysis Services, the domestic edible oil sector will likely see capex of INR4,500m in FY15.
According to the United States Department of Agriculture’s (USDA) reports, global edible oil supplies are expected to exceed consumption by 4.3mmt in OY14 compared to 2.5mmt in OY13. The higher net surplus is expected to result in the stock-to-use ratio swelling to a decade high of 12.3% in OY14 (OY13: 11.51%). However, Ind-Ra expects global consumption to be higher than USDA estimates on account of the spurt in demand for alternative use of edible oils such as bio-diesel blending.
As the prevailing international prices fail to attract additional supplies in the international market, major exporting nations plan to channel their surplus oil production towards internal consumption (bio-fuel blending). This would help absorb the incremental production and also control overall stock levels which in-turn would lend support to edible oil prices.
Major edible oil producing countries are pursuing local bio-diesel mandates (Indonesia: combining 10% bio-content with fossil fuel, Malaysia blending mandates under B7 – 7%  palm oil blending with fossil fuel and B5 - 5%  palm oil blending with fossil fuel and Argentina: 10% blending with fossil fuel) which in turn is expected to reduce exportable surplus and consequently the global stock-piles. The global palm oil stocks-to-use ratio (closing stock as a percentage of consumption) is expected to remain at 12.3% in OY14 compared to 12.9% in OY13, while the USDA foresees soyabean oil stock-to-use to drop to 7.4% from 8.3%. According Ind-Ra, this will result in prices remaining firm for both oils.
The agency also expects the narrow price difference between soyabean oil and palm oil price to prevail during OY14 and thereby prompt higher demand for crude soyabean oil imports. For 1QOY14, crude soyabean oil (CSO) imports registered an increase of 75.7% and constituted 8.8% of the total edible oil import basket (1QOY13: 5.2%).
WHAT COULD CHANGE THE OUTLOOK
Lower Capex: Any substantial reduction in proposed capex plans resulting in lower debt drawdowns and consequently improved leverage metrics (credit profile) could result in the outlook being revised to stable.
Higher Stock-piles: Higher-than-expected production levels could potentially outpace global demand thereby resulting in a higher stock build-up. This could exert pressure on international edible oil prices and trigger an outlook revision to negative.
(Source: Manager – Corporate Communications and Investor Relations, India Ratings & Research -A Fitch Group Company.)