Export ban, duties to weigh on rice mill stocks in near-term, say analysts

Shares of rice mill companies have underperformed the benchmark indices, so far this month, as the government banned exports of broken rice and slapped 20 per cent export duties on various grades of rice. Shares of LT Foods, Kohinoor Foods, KRBL, Chaman Lal Setia Exports, for instance, have declined in the range of 2 per cent to 9 per cent, as against 0.4 per cent gain in the Nifty50 index.

Though analysts foresee the government's protectionist measures to hurt companies in the near-term; good rice production and sound fundamentals are expected to override negative sentiments in the long-term, they said.

"These protectionist measures were unleashed by the government to tame inflation. While related-stocks may be negatively impacted in the near-term, we do not think they would last long. We suggest investors hold sound fundamental companies from the lot. LT Foods is a favorable bet from a long-term horizon," said Gaurang Shah, head investment strategist, Geojit Financial Services.

For AK Prabhakar, head of research at IDBI Capital, investors should stay away from rice mill stocks for another quarter.

"We don't think that the rice exporting companies will reap profits until the Russia-Ukraine war is resolved. Besides that, erratic rainfalls in rice-producing regions, too, have depleted stocks in the government's warehouse. Therefore, the government's top priority right now is to safeguard it," he said.

Last week, the government imposed 20 per cent export duty on non-basmati, unmilled, semi-milled, or totally milled, and husked brown rice to protect domestic supplies and calm prices after below-average monsoon season. Parboiled and basmati rice, however, were excluded from the export duty.

The blanket ban on broken rice exports and new duties on other grades of rice marks the third move by the Indian government to protect domestic supplies after it restricted exports of wheat and sugar.

According to the food ministry, the domestic rice production may fall 7 per cent to 9 per cent in the current crop year of 2022-23 in the range of 118 to 120 million tonne (mt) from 130 mt in last year, due to lower paddy acreage in rain deficient states like West Bengal, Bihar, Uttar Pradesh, and Jharkhand.

Therefore, lower crop production, coupled with restrictive export measures, cripples India - one of the world's largest rice producers from global trade as well. Globally, India accounts for 40 per cent of the global rice trade. With India's outbound shipments of broken rice at halt, rice futures soared over 21 per cent so far this year, shows data.

A Business Standard analysis of trade data shows that India's exports of broken rice climbed over 90 per cent in the financial year 2021-2022 (FY22) to $1.1 billion from $595.7 million in FY21.

Hence, analysts expect companies exporting broken rice will be mildly impacted. The situation, however, will improve if sales of basmati and parboiled rice compensate, said analysts.

"While the exports of broken rice will largely be impacted, we expect basmati and parboiled rice to make up for the damages. Mildly negative impact will be suffered by LT Foods since broken rice comprise 2-3 per cent of their sales," said Vinit Bolinjkar, Head of Research, Ventura Securities.