Mumbai based credit rating agency, India Ratings has assigns stable ratings to edible oil sector and the companies within the sector for fiscal year 2014-15 (FY15) from negative.
The agency expects the increase in the import duty on refined oils to 10 per cent from 7.5 per cent in January 2014 to result in crude edible oil becoming less expensive than refined oil even after factoring refinery costs, thereby making refining economically viable. This in turn is expected to improve the operating profitability of most edible oil companies engaged in refinery and high-sea sales.
The improvement in operating profitability is expected to offset the higher working capital requirements faced by most edible oil companies and result in improved operating cash flows, the report said.
According to Industry Analysis Services, the domestic edible oil sector will likely see capital expenditure (capex) of $749 million in FY15.
According to the United States Department of Agriculture’s (USDA) reports, global edible oil supplies are expected to exceed consumption by 4.3mmt in OY14 compared to 2.5mmt in OY13.
However, the agency expects global consumption to be higher than USDA estimates on account of the spurt in demand for alternative use of edible oils such as bio-diesel blending.
As the prevailing international prices fail to attract additional supplies in the international market, major exporting nations plan to channel their surplus oil production towards internal consumption (bio-fuel blending). This would help absorb the incremental production and also control overall stock levels which in-turn would lend support to edible oil prices, India Ratings outlook added.
Major edible oil producing countries are pursuing local bio-diesel mandates (Indonesia: combining 10 per cent bio-content with fossil fuel, Malaysia blending mandates under B7 – 7 per cent palm oil blending with fossil fuel and B5 - 5 per cent palm oil blending with fossil fuel and Argentina: 10 per cent blending with fossil fuel) which in turn is expected to reduce exportable surplus and consequently the global stock-piles.
However the agency said that outlook could change is there is a any substantial reduction in proposed capital expenditure (capex) plans resulting in lower debt draw downs and consequently improved leverage metrics (credit profile) could result in the outlook being revised to stable.
The higher-than-expected production levels could potentially outpace global demand thereby resulting in a higher stock build-up. This could exert pressure on international edible oil prices and trigger an outlook revision to negative.
