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India Ratings has upgraded its’ business outlook for the edible oil sector from ‘negative’ to ‘negative to stable’. The agency expects an improvement in the operating profitability of most companies, following the increase in import duty in refined oils.
In order to curb the import of refined oil and to protect the interest of domestic refiners, the Centre had recently raised the import duty on the commodity from 7.5 per cent to 10 per cent.
The increase has, however, resulted in crude palm oil becoming less expensive than refined oil. Consequently, importers will focus more on import of crude palm oil for refining and blending with other edible oils locally.
The change in the import duty structure is expected to benefit edible oil firms in terms of higher top line growth due to increased high-sea sales (selling while goods are still in transit) and refinery sales. It might also impact trading operations, which might experience a slowdown.
With the increase in proportion of higher margin refinery sales in the overall sales mix, the overall profitability and margins of companies are set to improve significantly in FY15 from FY14 and FY13 levels.
India Ratings expects fully-integrated refiners with wider product portfolios to benefit more, compared to players with limited product diversification. The players whose portfolios include branded products, would stand to gain additional margins.
For FY13, the overall median margins contracted by 10 basis points on account of unviability of refinery operations. The industry expects higher working capital requirement for refiners, especially on account of inventory and receivables.
This is because refining, unlike trading, requires companies to stock inventory for a higher period (especially raw materials and finished products). Receivable days are also expected to increase given most players would be in the process of trying to expand their reach (for both branded and unbranded products) and would be required to extend additional credit period to their distributors / customers.
The FY15 capex commitments stand at Rs 450 crore from the level of Rs 516 crore in 2013 and Rs 101 crore in 2014. Players with higher and non-deferrable capex may continue to witness a strained cash flow position, resulting in additional debt drawdown and credit profiles remaining marginally lower or similar to estimated FY14 levels.
However, players with negligible capex are expected to witness an improvement in their credit profiles.
