26/01/2012 (MoneyControl.com) - Fitch Ratings has come out with its outlook on Indian edible oil. The research firm expects, the prices of most edible oils will remain firm and overall production of mustard and groundnut oilseeds may decline due to lower acreage and yields that would result in lower crushing and output.

Fitch Ratings' outlook for the Indian edible oil industry in 2012 is negative. The agency expects higher revenue growth led by firm pricing on global cues of lower stock to consumption ratio to be offset against higher input costs resulting in margin pressures. Fitch expects the margin pressures coupled with higher working-capital needs and expansion plans to exert pressure on the liquidity profiles of most edible oil companies.

Prices to Remain Firm: Fitch expects the prices of most edible oils will remain firm. A limited increase in global crude palm oil (CPO) production expected by Fitch will be off-set by higher demand from India and China. Soyabean production growth is likely to be lower in 2012 due to poor weather conditions in South America. Further Fitch expects overall production of mustard and groundnut oilseeds to decline due to lower acreage and yields that would result in lower crushing and output.

Refining to Boost Trading: Reduction in export duty on refined palm oil and increase in duty on CPO by Indonesia is likely to result in lower capacity utilisation for refiners and a surge in trade of refined palm oil.

Margin Pressure: The operating margins of established companies (particularly refiners) would be squeezed by competition from even small-sized, refined palm oil importers. However, companies with backward integration extending to the plantation level would have increased control over supplies and be in a better position to mitigate this risk to an extent. Fitch expects margin pressures in other edible oils (excluding palm) when palm oil is available at a significant price discount (more than 20%) to the other edible oils.

Liquidity Pressure: Most edible oil companies will have lower operating cash flow (CFO) over 2012. This, coupled with higher working-capital needs (on account of increased inventory) and inflexibility to defer capex, would result in further pressure on free cash flow (FCF) of companies. The agency notes that non-integrated companies particularly refiners who have undertaken largely debt-funded capacity additions/expansion especially in palm oil refining will face greater liquidity pressures.

Impact on Credit Profiles: Companies with lower or no branded products segment, non-diversified product portfolio and inability to defer capex will register significant deterioration in overall credit metrics. Fitch expects Liberty Oil Mills Limited (�Fitch BBB-(ind)'/Stable) to maintain its stable credit profiles led by higher cash balance and lower debt.

What Could Change the Outlook
Regulatory Changes: Outlook may be revised to stable if there are any positive regulatory changes either in oil-producing countries (such as Indonesia and Malaysia) or in India (where countervailing duty is imposed) that improve the economic viability of refining operations in India. Additionally, any substantial reduction in proposed capex plans that reduces leverage would also aid in reverting the outlook to stable.

Robust Domestic Demand and Lagging Production to Result in Firm Prices
According to the United States Department of Agriculture (USDA) reports, India's edible oil consumption is expected to grow at a CAGR of 5% yoy to 17.1 million tons (mt) for 2011-12 from 16.3mt in 2010-11 while domestic edible oil supply will increase by 3.9% yoy to 8.0mt from 7.7mt. India is a large importer of edible oil and domestic edible oil prices generally tend to exhibit a strong correlation with international prices particularly of palm oil and soyabean oil.

Margin Pressures
Fitch expects palm oil refiners to experience margin pressures due to lower refining operations and increased trading activities. Companies with increased control over suppliers extending to the plantation level would be able to off-set this risk to a limited extent. For 2012 integrated oil companies are likely to register better margins than refiners.