According to CRISIL Ratings, local edible palm oil refiners' revenues should increase by almost a tenth this fiscal year due to stable demand and increasing realisations. Due to favorable prices and the continuation of duty-free imports, operating profitability is predicted to increase by 40-50 basis points (bps) to approximately 3.5%. In the medium run, palm oil refiners' credit risk profiles will remain steady due to their robust balance sheets and lack of significant debt-funded capital expenditure (capex). This is supported by a study of nine CRISIL-rated companies, which together generate around ₹75,000 crore, or one-third of industry revenue.
Palm Oil Dominates Indian Edible Oil Market
Looking to Export Edible Oil in Bulk? In terms of volume, 38-40% of edible oil consumed in India is made up of palm oil. 45-50% of the total utilization is concentrated in the food processing and HoReCa (hotels, restaurants, and catering) industries. The remainder of consumption is divided between the industrial and home sectors. The demand for palm oil would be sustained by urbanization and rising processed food consumption, resulting in a 3-4% increase in volume to roughly 93 lakh tons this fiscal year. India depends more than 90% of its demand for crude palm oil (CPO) on Malaysia and Indonesia, even though it has adequate refining capacity.
Global Palm Acreage Stagnation Drives Up Prices
Prices have increased as a result of the global stagnation of palm acreage as a result of sustainability and environmental concerns. Although the most recent budget seeks to increase domestic oilseed production, Rahul Guha, Director at CRISIL Ratings, pointed out that outcomes might not be seen right away. The output of crude palm oil (CPO) is predicted to stay constant at 78-79 million tonnes globally, which will result in a 7-8% price increase this fiscal year. This will result in a 10% increase in revenue for the palm oil sector in India when combined with consistent volume growth.
Government Policy Supports Indian Refiners' Profitability
Operating margins for Indian refiners are predicted to rise by 50 basis points from 3.5% as a result of robust commodity hedging, higher economies of scale, and ongoing duty-free importation of crude palm oil (CPO). The Indian government has extended the 0% import tariff on CPO until March 2025, up from the prior expiration date of March 2024, according to Rishi Hari, Associate Director at CRISIL Ratings. This extension will assist control domestic supplies, stabilize prices, and support profits this fiscal year. It comes after a period of high 40% import taxes prior to the epidemic.
No Capacity Expansion Planned for Indian Refiners
According to CRISIL, Indian refiners are uncertain to expand their capacity in the medium term due to sluggish global supply, and cash accrual will more than cover any increases in working capital requirements and maintenance capital expenditures. With total external obligations to tangible assets (TOLTNW) alongside interest coverage rates projected to be 1.25 times and 4 times, respectively, credit profiles will therefore remain stable this fiscal year. Nevertheless, it stated that it will be important to monitor the effects of geopolitical issues and the dynamics of the global edible oil trade.
Conclusion
In summary, the CRISIL analysis shows that India's palm oil refiners have a bright fiscal future thanks to consistent demand, increased realisations, and helpful government initiatives. Indian refiners stand to gain from greater profit margins and stable bank profiles even if global supply shortages and static acreage are driving up prices. The industry's resiliency is highlighted by the continuation of zero import taxes and the prudent management of domestic supplies. But to maintain this upward trend, ongoing attention to geopolitical issues and the mechanics of global trade will be necessary.
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