FINAL REPORT OF DESK RESEARCH ON INDIAN EDIBLE OIL INDUSTRY

GROUP - 15 SUBMITTED BY
MAHAMMAD BALESARIA 124238 AJAZ KHAN 124203 VENUS JAICHANDANI- 124256

CONTENT
1. Background of Indian edible oil industry 2. Overview of the Indian Edible Oil Industry 3. Introduction 4. Importance of Edible Oils in the Countrys Economy 5. Types of oils commonly used in India 6. Consumption Pattern of Edible Oils in India 7. Developments in the Industry Raw material production Institutional support to raw material production National milling capacity Production of edible oil and fat Local Market 8. Trends in the edible oil industry Favorable demand outlook for edible oils;
underpenetrated market offers significant growth potential

 Domestic production lags demand growth,

thereby leading to heavy reliance on imports

Reduction in import volumes witnessed for

the first time in the last three years during

consumption is also influenced by regional

preferences; palm, soyabean and mustard oil are the three major edible oils

High fragmentation and competition put

margins of pressure domestic participants under and

Strong

linkage between domestic international edible oil prices

Branded oil sales, although currently low in

India, are expected to grow due to renewed thrust by major players

Some trends of consolidation visible in the

industry; large-scale integrated players leading the capacity addition process through expansion as well as acquisition/consolidation

Background of Indian edible oil industry

Edible oils constitute an important component of food expenditure in Indian households. Historically, India has been a major importer of edible oils with almost 30-40% of its requirements being imported till 1980s. In 1986, the Government of India established the Technology Mission on Oilseeds and Pulses (TMOP) in order to enhance the production of oilseeds in the country. The TMOP launched special initiatives on several critical fronts such as improvement of oilseed production and processing technology; additional support to oilseed farmers and processors besides enhanced customs duty on the import of edible oils. Consequently, there was a significant increase in oilseeds area, production, and yields until the late-1990s. However, in order to fulfill its obligations towards various international trade agreements and also meet the increasing demand-supply deficits, India began to reduce import restrictions on edible oils in the late 1990s; and it was gradually brought under Open General License. This led to a significant slump in the domestic oil seeds market, as edible oil prices fell sharply in line with the low international prices prevailing at that time. Subsequently, the duty structure was modified

so as to maintain a duty differential between crude and refined varieties in order to protect the domestic industry. Nevertheless, due to high import dependence, domestic edible oil prices remain highly correlated to international edible oil price movement, and this has resulted in volatility in the key credit metrics of rated edible oil companies. At the same time, ICRA notes that edible oil companies with benefits of largescale integrated operations, multi-product offerings and recognizable branded presence in retail markets have fared better as compared to small/medium-scale domestic oilseed crushers.

Overview of the Indian Edible Oil Industry

India has a vibrant private sector driven edible oil industry. With the right macro-economic policies now in place, the sub-sector has made a huge turn around and it is no longer an eyesore. The edible oil industry is now one of the leading sustainers of the positive annual economic growth rates India has enjoyed for over a decade now. Indias demand for edible oil has been growing at a rate of 8-9 per annum. The national demand for edible oil is projected to reach over 110.25 lakh MT in 2005 up from 100.96 lakh MT in 2001. National production as of 2001 stood at 54.54 lakh MT making India a net importer of edible oil to the tune of over 46.92 lakh MT. This gives investment opportunities into the edible oil industry. Trained, trainable as well as unskilled labour is readily available for prospective investors in the sector to utilize.

Introduction

Oilseeds and edible oils are two of the most sensitive essential commodities. India is one of the largest producers of oilseeds in the world and this sector occupies an important position in the agricultural economy and accounting for the estimated production of 28.21 million tonnes of nine cultivated oilseeds during the year 2007-08. India contributes about 6-7% of the world oilseeds production. Export of oilmeals, oilseeds and minor oils has increased from 5.06 million tonnes in the financial year 2005-06 to 7.3 million tons in the financial year 2006-07. In terms of value, realization has gone up from Rs. 5514 crores to Rs.7997 crores. India accounted for about 6.4% of world oil meal export. India consumes around 11 million tonnes of edible oil in a year, which constitutes import of nearly 6 million tonnes. However, after China, India is the worlds biggest buyer of vegetable oil. The countrys meet half of its edible oil requirements through import. To check the inflation, state owned trading companies may start increasing their overseas purchases. The govt. has reduced levy on vegetable oil four times last year and joined the club of China, Thailand and Malaysia in safeguarding food supplies. There are two major features, which have very significantly contributed to the development of this sector. One was the setting up of the Technology Mission on Oilseeds in 1986. This gave a thrust to Governments efforts for augmenting the production of oilseeds. This is evident by the very impressive increase in the production of oilseeds from about 11.3 million tonnes in 198687 to 24.8 million tonnes in 1998-99. There was some setback in 1999-2000 because of the un-seasonal rain followed by inclement weather. The production of oilseeds declined to 20.7 million tonnes in 1999-2000. However, the oilseeds production went up to 27.98 million tones in 2005-06 and was 24.29 million tonnes during 2006-07 oil year. As per the 3rd advance estimate by Ministry of Agriculture dated 22.4.08 the production of nine major oilseeds

is estimated to be about 28.21 million tonnes during 2007-08. The other dominant feature which has had significant impact on the present status of edible oilseeds/oil industry has been the programme of liberalisation under which th e Governments economic policy allowing greater freedom to the open market and encourages healthy competition and self regulation rather than protection and control. Controls and regulations have been relaxed resulting in a highly competitive market dominated by both domestic and multinational players.

Importance of Edible Oils in the Countrys Economy

Oilseeds and edible oils are two of the most sensitive essential commodities. India is one of the largest producers of oilseeds in the world and this sector occupies an important position in the agricultural economy covering an area of 24.38 million hectares and accounting for the production of 20.87 million tonnes of oilseeds during the year 19992000. India contributes about 9% of the world oilseeds production, about 7% of the global production of protein meal and is the 4th largest edible oil economy in the world. Export of oil meals, oilseeds and minor oils for the financial year 1999-2000 slightly declined from 3.96 million MTs in 1998-99 to 3.15 million tons in 1999-2000. However, in terms of value, realization has gone up from Rs.3180/- crores to Rs.3327/- crores. The share of India in the world oil meal export market is about 7%.

Types of oils commonly used in India

India is fortunate in having a wide range of oilseeds crops grown in its different agro climatic zones. Groundnut, mustard/rapeseed, sesame, linseed, Niger seed/castor are the major traditionally cultivated oilseeds. Soya bean and sunflower have also assumed importance in recent years. Coconut is most important amongst the plantation crops. Efforts are being made to grow oil palm in Andhra Pradesh, Karnataka, Tamil Nadu in addition to Kerala and Andaman & Nicobar Islands. Among the nonconventional oils, rice bran oil and cottonseed oil are the most important. In addition, oilseeds of tree and forest origin which grow mostly in tribal inhabited areas are also a significant source of oils.

Consumption Pattern of Edible Oils in India

India is a vast country and inhabitants of several of its regions have developed specific preference for certain oils largely depending upon the oils available in the region. For example, people in the South and West prefer groundnut oil while those in the East and North use mustard

seed/rapeseed oil. Likewise several pockets in the South have a preference for coconut and Sesame oil. Inhabitants of northern plain are basically hard fat consumers and therefore prefer Vanaspati, a term used to denote a partially hydrogenated edible oil mixture. Vanaspati has an important role in our edible oil economy. Its production is about one million MT annually. It has around 13% share of the edible oil market. It has the ability to absorb a heterogeneous variety of oils which do not generally find direct marketing opportunities because of consumers preference for traditional oil such as groundnut oil, mustard oil, sesame oil etc. For example, newer oils like Soya bean, sunflower, ricebran and cottonseed and oils from tree and forest sources have found their way to the edible pool largely through vanaspati route. Of late, things have changed through technological means such as refining, bleaching and De-odouraisation, all oils have been rendered practically colorless, odorless and tasteless and, therefore, have become easily interchangeable in the kitchen. Newer oils which were not known before have entered the kitchen, like those of cottonseed, sunflower, palm oil or its liquid fraction, palmolein, Soya bean and ricebran. All of them are again essentially bland, processed edible oils. About 60-70% predominantly groundnut and mustard seeds are used to make nonrefined or filtered oils. These tend to have a strong and distinctive test preferred by most traditional customers. About 70% of these filtered oils produced are by the organized and semiorganized sector plants producing from 2000-10000 MT per month. It is often branded by large manufacturers. The lower quality and generally lower cost filtered oil produced is mainly by the small scale village based processors. The oil is mostly sold loose directly to the consumers from a variety of containers, often within 2-3 days of production. These local crushers will produce between half and two MTs per month. This decentralized production and marketing pattern may account for around

20% of all edible oils in the country. The share of raw oil, refined oil and vanaspati in the total edible oil market is respectively 42.0%, 42.7% and 13.4%.

Developments in the Industry

All agricultural activities in the country will be guided under the Plan for the Modernization of Agriculture (PMA). The PMA is part of the Government of Indias broader strategy of poverty eradication contained in the Poverty Eradication Action Plan (PEAP). Strategically the PMA objectives include: Deepening decentralization Reduction in public sector activities in favour of the private sector Adoption of productivity enhancing technologies The overall government policy framework in the agricultural sector therefore continues to emphasize private sector participation and investments. This emphasis is highlighted in a comprehensive strategy to deal with major constraints to private sector development Specifically, in the edible oil industry: The sub-sector has been fully liberalized to create competition in production, processing and marketing, he taxation system is being harmonized so that oil millers operate on a level playing field, and Institutions that promote raw material production have been set up and are adequately financed.

Raw material production

Production of raw material in the edible oil industry has shown an upward trend. In 2001, 208.72 lakh MT of locally available oilseeds were crushed and this scenario is projected to grow positively. Today, the number of farm families involved in oilseeds growing has been expanding. This trend has reduced the reliance on imports to meet the national edible oil.

Institutional support to raw material production

A number of institutions have been created to boost production of raw materials for crushing: The National Agricultural Research Organization (NARO) spearheads research in the production and dissemination of improved varieties for vegetable oil processing. The Cotton Development Organization (CDO) was set up to revive the cotton industry. Already modest progress has been recorded in the supply of crushable cottonseed. Solvent Extractions Association of India (SEA), a private sector organization, is very instrumental in coordinating the rehabilitation and development of

edible oil sub-sector. SEA has established a sustainable seed multiplication and distribution system in the country.

National milling capacity

There are presently 1,50,000 oil crushing units utilizing 10-30% of their capacity,785 Solvent Extraction Units utilizing 32% of their capacity,950 Refineries utilizing 32% of their capacity and 222 Vanaspati Units utilizing 41% of their capacity, in the country. The large-scale processors have sophisticated refining, downstream manufacturing and packaging facilities. Medium-scale mills follow a similar design of 4 or 5 low-capacity expellers, a decorticator, a low-pressure boiler and a crude oil neutralizing vessel.

Production of edible oil and fat

Large-scale commercial production of refined vegetable oil and fat is a possible investment. National demand for vegetable oil exceeds local production, making India a net importer of Edible oil and fat. Currently, national demand stands at about 108.65 lakh MT and about 45% of this is met by imports. Out right purchase of existing mills or joint venture arrangement with the owners are possible investments in this area. By Indian standards, a large-scale oil processing facility is estimated to require a minimum of US $ 350,000 450,000 on equipment and accessories.

Local Market

The local market for oil in India is comprised of households, baking and confectionery industry, and the food service industry. Most urban areas have a range of cooking oils in shops and markets.National demand for vegetable oil is growing at 8-9% p.a. Demand for vegetable oil is expected to reach 110.25 lakh MT in 2005. This is an indicator of potential investment in the sub sector.

KEY TRENDS & CREDIT IMPLICATIONS

Favorable demand outlook for edible oils; underpenetrated market offers significant growth potential:
The demand for edible oils in India has shown a compounded growth of 4.5% over the last 10 years and is estimated at 16.2 million tonnes for Oil Year (OY) 2010-11. India plays an important role in the global edible oil market, accounting for approx. 10.2% share of consumption; 7% share of oilseed production; 5% share of edible oil production and 13.6% share of world edible oil imports for OY 2009-10. As per USDA estimates, India is the third largest consumer of edible oils (after China and the EU-27 countries); and will account for 11% of global edible oil demand and 16% of global imports in OY 2010/11F. Indias annual per capita consumption has shown a steadily increasing trend from 4 kg in the 1970s to 10.2 kg in the late 1990s to current levels of ~13.5 - 14 kg. However, it still ranks well below the world average of around 24 kg (per capita figures including consumption of bio-energy), thereby signifying the high growth potential of the industry. Refer Charts 1 and 2 for trend in domestic demand and per capita consumption of edible oils in India.

According to ICRA, the medium-to-long term demand outlook for edible oils in India is favorable (with expected growth in the vicinity of 4-5% p.a.), catalyzed by the growing population and expected increase in per capita consumption which in turn would be driven by changing lifestyles; growing urbanization; increasing proportion of middle class population and steadily rising affluence levels.

Domestic production lags demand growth, thereby leading to heavy reliance on imports :
As compared to demand growth for edible oils, the domestic oil and oilseed production has remained largely stagnant on account of low productivity in under-irrigated areas and shifting of acreage from oilseeds to other crops. This has resulted in a significant demand-supply gap, which has been met through imports, which have been further incentivized by a sharp cut in import duties. In the period from 2001 to 2008, import duties on crude soyabean oil / palm oil was in a prohibitively high range of 40%-90%. In order to curtail inflation, GoI revised these protectionist tariffs downwards to 7.5% for refined palm / soybean oil and 0% for crude palm / soyabean oil in April 2008, resulting in a surge in volumes of imported oils that currently meet almost 45-50% of domestic consumption requirements.

Reduction in import volumes witnessed for the first time in the last three years during :
H1OY2010-11; nonetheless, high dependence on imported oils is expected to continue Edible oil imports witnessed a sizeable 21% y-o-y reduction in H1 OY2010-11 (November 2010- April 2011), as can be observed in Chart 4. This has largely been on account of relatively higher domestic oilseed availability (~29-30 MT expected for OY2011 as against 24.9 MT for OY2010) and Consequently higher domestic oil production. The high crude palm oil prices (trading almost at par with soya during December 2010- February 2011), following concerns over production estimates in Malaysia, also resulted in lower imports, as edible oil players resorted to running down of inventory levels. The subsequent improvement in estimates of palm oil production has led to some correction in prices, which coupled with forthcoming festive demand is likely to revive import volumes in H2OY2011. Considering the current year domestic edible oil supply of 8.0-8.5 million tonnes per annum and factoring a normal growth of 2%-3% (through moderate expansion in cultivated area and yield improvements) in supply, ICRA expects the significant gap between domestic demand and supply to persist; and result in continued import dependence for at least 45% of consumption requirements, notwithstanding the dip in imports seen in H1OY2011.

Apart from price, consumption is also influenced by regional preferences; palm, soyabean and mustard oil are the three major edible oils:
An important characteristic of the Indian edible oil consumption pattern is the variation in preferences across regions, driven by taste and availability. For instance, soyabean oil is mainly used in northern and central regions of India due to the local availability of soyabeans. Mustard oil is largely consumed in northeastern, northern and eastern regions of India, as its pungency is a desired and inherent part of the local cuisine. Palm oil has increasingly become the oil of choice in southern India due to the warmer climate (palm oil gets a cloudy appearance in colder climates) and easy availability from South-east Asia. The increased health awareness also determines the consumption pattern with mustard and soya considered healthier than palm oil, which has higher levels of saturated fats. Oils like rice bran and olive are also gaining popularity due to their superior health properties, although their consumption remains fairly low in absolute terms. Further, price economics also have an important role to play in determining consumer choice, given that expenditure on edible oil constitutes a significant portion of the household budget.

In terms of volume, palm, soyabean and mustard/rapeseed oil are the three major edible oils consumed in India and together account for 75% of the total edible oil demand, as indicated in Chart 5. While mustard oil is almost entirely produced within the country, soyabean oil is imported in significant quantities (about 45%-50%). Palm oil is entirely imported in crude form for refining in port-based refineries while some quantities are also imported in the refined form. Given the cost economics and taste preferences of consumers, ICRA expects these three varieties of edible oil to dominate the consumption mix. Accordingly, companies with an exposure to these oil varieties stand to benefit. Given the inherent volatility in prices, ICRA believes that participants with a diversified presence across edible oil categories would be better placed than participants focused on a single variety of oil, due to the flexibility to modify product portfolio in line with market parity and maintain optimum capacity utilization levels.

High fragmentation and competition put margins of domestic participants under pressure:
The edible oil industry in India is characterised by intense competition and fragmentation, with the presence of a large number of units attributable to low entry barriers such as low capital and low technical requirements of the business and a liberal policy regime (SSI reservation for traditional oilseeds and sales tax incentives by various state governments). While a number of inefficient units closed down after reduction of high import tariffs on imported edible oils, the average capacity utilisation rates of Indian oilseed processors remain very low (at ~30%-40%), with many of them operating only for a part of the year, that is, during the local harvest season of raw materials. As a result of this high competition and fragmentation, margins in the edible oil business tend to be thin. Further, they are exposed to risks of commodity price volatility and forex movements.Notwithstanding the above, the market includes some large industry participants like Marico Limited, Cargill India Private Limited, Adani Wilmar Limited, Ruchi Soya Industries Limited and KS Oils Limited, which have a diversified product portfolio; multiple manufacturing units and operate on a pan India basis mainly in the branded segment. ICRA believes that the larger manufacturers by virtue of their scale enjoy certain advantages like access to cheaper working capital credit and savings in cost of production, which make them relatively better positioned to withstand margin pressures and difficult Industry conditions.

Strong linkage between domestic and international edible oil prices:

The domestic edible prices are directly linked to the prices of imported palm and soyabean oil due to heavy reliance on imports and substitutability amongst oil varieties. Given the high volatility in international edible oil prices, domestic participants are exposed to the risk of unexpected squeeze on margins due to pricing mismatches between raw materials (which are linked to domestic factors) and final product prices (affected by global factors). The international prices of edible oils increased sharply and reached their peaks around June 2008, driven by high crude oil prices that led to the diversion of edible oilseeds to bio-fuel usages apart from other shortages in supply. In August 2008, edible oil prices in local and international markets fell by more than 50% (month-on-month) because of a drop in crude oil prices; falling demand on account of global recession andhealthy production figures. The prices remained volatile during FY10 with only a marginal recovery but remained lower than the peak average of FY09 on an overall basis. In recent months, edible oil prices have shown significant recovery, following increasing crude oil prices; anticipated increase in bio-fuel demand; expected production shortages for CPO production in Malaysia/Indonesia and growing demand. There is also a noticeable trend of reduction in differential between palm oil and other edible oils, especially soyabean and rapeseed oils. Given the likelihood of sustained high crude oil prices in the near term, ICRA believes that edible oil prices would continue to remain firm.

Industry remains vulnerable to the risk of narrowing import duty differential:

Beginning 2007-08, there has been a progressive reduction in import duties on crude and refined edible oils. Most of these policy changes have been made in order to comply with foreign trade agreements entered by India with other countries and associations such as ASEAN apart from meeting shortfalls in domestic supplies and curtailing inflation. In the last round of changes in duty structure (April 2008), the duty on crude palm oil was made nil while that on refined palm oil was made 7.5% (7.7% including education cess), with the net duty differential being maintained at 7.5% to protect the domestic industry 3. Going forward, the reduction of import duty differential remains a key regulatory risk for the industry.

Branded oil sales, although currently low in India, are expected to grow due to renewed thrust by major players
Given the presence of a large number of unorganised participants in the Indian edible oil market, the share of branded product sales has remained low with most low-income consumers opting for cheaper oils sold in loose form. As per industry data, only about 31% of urban households and about 9% of rural households consume branded edible oils, with the national average at 16%. Given the low penetration of branded oils; increasing affluence levels and quality consciousness of the Indian consumers, there is a significant growth potential in the branded segment. Amongst the major edible oils consumed, palm oil is still largely traded as a commodity and sold mostly in loose form, with packaged sales accounting only for 15%-20% of total sales. Sunflower and soya oil, on the other hand, have a high proportion of packaged sales estimated at around 70% and 55% of total sales. The major participants in the organised sector, namely, Ruchi Soya, Adani Wilmar Limited (AWL) & Cargill India, have a strong presence in the branded segment, with branded sales accounting for 38%, 58% and 60% of total edible oil sales of these companies respectively. Moreover, a few mid-sized, regional edible oil companies such as Mantora Oil Products Ltd, Modi Naturals and Tara Health Foods Ltd have also been striving to establish their brands. From a credit perspective, ICRA considers high share of branded sales as a strength, given the favourable outlook for growth; relatively high margins; stability of offtake and better pricing power as compared to the bulk market. Nonetheless, since branding activities entail high upfront outlay while sales volumes may take time to scale up, profitability margins of companies undertaking large-scale branding efforts are likely to come under pressure during the interim gestation period.

Some trends of consolidation visible in the industry; large-scale integrated players leading the capacity addition process through expansion as well as acquisition/consolidation :
The edible oil industry in India in the recent past has witnessed both organic as well as inorganic expansion by some of the major players. AWL has added 1090 TPD of installed capacity for refining and 5050 TPD of installed capacity for seed processing during CY 2010-11 by acquiring five operational plants and undertaking expansion at three out of its four existing plants. AWL has also additionally taken over the operations of other Wilmar associates in India (like Acalmar Oils & Foods Limited) so as to consolidate its pan-India presence. Sanwaria Agro Oils Limited has added 1000 TPD crushing capacity in 2009 through acquisition of two plants. KS Oils has set up new facilities at Kota, Ratlam and Guna, totaling 3400-3600 tpd, and acquired a refining unit at Haldia. Further, some edible oil manufacturers have also undertaken backward integration to strengthen their overall business model. KS Oils has acquired 1,38,000 acres of palm plantations in Indonesia while Ruchi Soya has access to 1,75,000 hectares of agricultural land with palm plantations across different Indian states. While ICRA considers this consolidation and capacity expansion trend as a favourable development due to the benefits associated with large scale of operations, on the flip side, the adverse impact of such activities on the capital structure; profitability and return metrics of the concerned companies, particularly during the gestation period, presents a downside risk.