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CRISIL Ratings has come out with its report on Indian rice. As per the rating agency India’s rice exports is expected to reach around 7 million tonnes in 2011-12, up from 2.2 million tonnes in 2010-11.
Increased exports, improved profitability support rice millers’ credit profiles
The next 12 months augur well for India’s rice millers. Expectation of a bumper rice crop in India in 2011-12 (refers to the period, October 1 to September 30), lifting of the ban on non-basmati rice exports, and a weak production outlook for most rice-exporting countries may drive a sharp increase in India’s share in global rice trade. CRISIL believes that India’s share may triple to 21% in 2011-12 from 7% in 2010-11. CRISIL expects the credit risk profiles of India’s rice millers to, however, remain at current levels owing to the highly leveraged capital structure, offsetting expected improvement in profitability levels.
The benevolent monsoon across rice cultivating states is expected to help India’s rice production reach 100 million tonnes in 2011-12, up 6 per cent over the previous year. Says Mr. Gurpreet Chhatwal, Director, CRISIL Ratings, “We expect India’s rice exports to reach around 7 million tonnes in 2011-12, up from 2.2 million tonnes in 2010-11. The Government of India’s decision to lift the ban on export of non-basmati rice in September 2011 could not have come at a more opportune time. The lifting of the ban may translate into additional USD2 billion in export revenue for India’s rice millers and exporters in 2011-12.”
The expected decline in rice production in leading rice exporting nations such as Thailand, Vietnam and Pakistan may also favour India’s exporters. Rice production in Thailand, the largest exporter, is expected to decline in 2011-12 due to a damaged crop, following floods. The Thai government’s decision to increase its minimum purchase price of rice may also reduce the competitiveness of Thai rice globally. White milled Thai rice, for instance, is expected to be priced at USD600 to USD610 per tonne, higher by USD120 to USD150 per tonne over the comparable variety of Indian rice.
Adds Mr. Mohit Makhija, Senior Manager, CRISIL Ratings, “Healthy export opportunities, low paddy prices and a favourable exchange rate will lead to improved profitability for rice millers in 2011-12. A CRISIL study on 170 of its rated rice millers indicates that higher rice exports will lead to improved profitability. While paddy prices in the current season are 25% lower than those of the previous year, the prices of milled rice are unlikely to reduce by the same proportion, given the low supplies from the leading rice- exporting nations.”
Depreciation in the value of the Indian rupee against the US dollar since September 2011 may benefit rice exporters, as it makes India’s rice more competitive globally. CRISIL expects the profitability of India’s rice millers to increase by 150 basis points (bps, 100 bps equals 1 percentage point), depending on the proportion of exports in overall sales. However, given the working capital intensity of the rice industry, improvement in the millers’ capital structures may be restricted to those entities that have direct contacts with overseas buyers.
Therefore, Indian rice millers with established overseas buyers and prudent working capital management practices can expect a windfall rice season at hand.