TEXT-Fitch: India Edible Oil outlook stable in 2010

(The following statement was released by the ratings agency)

Feb 8 - Fitch Ratings has today said, in a just published Special Report, that the outlook for India's Edible Oil sector is stable, due to continuing improvement in demand, fuelled by India's growing per capita GDP. Companies with conservative hedging and inventory policies, strong raw material sourcing arrangements, and geographically dispersed plants (which keep logistical costs optimal), are likely to have stable credit profiles in 2010. However, many are entering the branded edible oil segment, where margins will be lower during the entry phase due to the associated sales and marketing expenses. This entry could also result in higher working capital requirements. Some operators, anticipating higher prices, are believed to have built up inventories, which could constrain liquidity and could be adversely impacted should edible oil prices decline. Aggressive inventory strategies would remain a rating concern.

The oil seed deficit in the Indian market will likely continue, since production remains short of the strong growth in demand. To meet this increased demand, the government has reduced duties on crude edible oils - a trend that the agency believes will be sustained. Fitch believes that the higher duties on refined oils (in the range of 7.3% to 7.75%) relative to crude oil (nil import duties) will continue to support the margins of edible oil refiners.

With a shift in consumption patterns in India towards the relatively cheaper palm oil, many larger operators are increasingly shifting their focus in response. Fitch expects that larger entities such as KS Oils Limited (KSOI.BO) (KSO, 'BBB+(ind)'/Stable/'F2+(ind)') will eventually have the flexible capacity to process both palm and soya oils which, together with mustard oil, accounts for around 70% of India's edible oil consumption.

Furthermore, in response to increased consumption of palm oil, companies like KSO and Ruchi Soya Ltd have plans to set up palm plantations in South-East Asia for backward integration. Although this exposes them to execution risk during the implementation phase, the completion of the capex will support margin stability for these firms in the long-term.

Fitch expects tightly balanced global demand/supply dynamics for palm oil in 2010, as incremental production is expected to be lower than demand growth, and prices will likely remain at current levels (about USD700/tonne). With other edible oils typically moving in tandem, Fitch expects the prices of other key oils like soya and mustard to also remain firm.

Integrated players which are present primarily in smaller oils segments like mustard, ground nuts, coconut, and to a lesser extent, soya, will continue to exhibit stable margins. With the relative shortage of mustard seed production during Q110, mustard seed prices have remained firm and Fitch expects the trend to continue over 2010. The agency believes that for larger players who already have established brands, this additional cost could be partly offset by an increased proportion of higher-margin branded products and growing demand.