 "Profitability of basmati rice exporters to remain under pressure in H1FY17")
India’s basmati rice exports are likely to remain under pressure till the first half of the financial year 2016-17 on excess supply in destination markets. Improvement, if any, would be seen only in the second half with gradual receding in inventory resulting into price increase, said a recent Icra report.
Importing countries led by Saudi Arabia, Iran and United Arab Emirates (contributing nearly half of India’s exports) stepped up their inventory building on sharp fall in the prices of the aromatic rice. Consequently, India’s basmati rice exports shot up by 20% to 3.07 million tonnes between April–December 2015 as compared to 2.57 million tonnes in the corresponding period last year, data compiled by Apeda showed.
Interestingly, falling prices have lowered exporters’ realisation from overseas sales. While the realisation has declined by 14% to Rs 17,588 crore, the same tanked further in dollar to $2,717 million resulting into per unit realisation declining to $885 a tonne between Apr–Dec 2015 as compared to $1,312 a tonne in the comparable period last year.
Meanwhile, the current scenario of excess supply (weak demand) is expected to continue in the near term and exporters are likely to continue facing financial stress in the near term. Weak sales growth and decline in profitability, along with inventory losses, are expected to be the key trends in the financials (to be reported) of basmati rice players in 2015-16. This is expected to further weaken the leverage profile of industry players. Any improvement in the situation is likely only from the next basmati paddy harvest season, that is, the second half of 2016-17.
The industry has reported steady growth in its revenues till 2013-14 given the rising demand in the market leading to high volume of sales and high realisations. However in FY15, the industry witnessed a decline in demand following the ban imposed by Iran on import of rice. Consequently, Indian basmati rice industry reported decline in value of sales in 2014-15.
The industry remains vulnerable to inventory price risk given sizeable stock levels of the players. As witnessed in FY15, weakness in demand led to correction in prices which impacted the inventory positions of the players and hence their profitability. The decline in profitability and industry’s inability to liquidate its sizeable stocks resulted in increased working capital borrowings. Thus, the industry reported increase in leverage and weakness in coverage metrics in FY15.
The significant impact was witnessed in quarter ending March 2015 when the sales did not grow (unlike same quarters in previous years) and profitability and hence interest coverage declined significantly. This was largely driven by decline in realisations in the aftermath of ban imposed by Iran on import of rice. Further, as reflected in the first three quarters of 2015-16, the pressure on revenue and profitability is expected to continue in the near term.
Importing countries led by Saudi Arabia, Iran and United Arab Emirates (contributing nearly half of India’s exports) stepped up their inventory building on sharp fall in the prices of the aromatic rice. Consequently, India’s basmati rice exports shot up by 20% to 3.07 million tonnes between April–December 2015 as compared to 2.57 million tonnes in the corresponding period last year, data compiled by Apeda showed.
Interestingly, falling prices have lowered exporters’ realisation from overseas sales. While the realisation has declined by 14% to Rs 17,588 crore, the same tanked further in dollar to $2,717 million resulting into per unit realisation declining to $885 a tonne between Apr–Dec 2015 as compared to $1,312 a tonne in the comparable period last year.
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“Supply of basmati paddy is expected to witness some moderation as farmers are likely to shift away from basmati, given the non-remunerative prices in the last two crop cycles. Moreover, since Iran has removed the ban on import of rice, demand is also expected to witness some improvement, going forward,” said the report.
Meanwhile, the current scenario of excess supply (weak demand) is expected to continue in the near term and exporters are likely to continue facing financial stress in the near term. Weak sales growth and decline in profitability, along with inventory losses, are expected to be the key trends in the financials (to be reported) of basmati rice players in 2015-16. This is expected to further weaken the leverage profile of industry players. Any improvement in the situation is likely only from the next basmati paddy harvest season, that is, the second half of 2016-17.
The industry has reported steady growth in its revenues till 2013-14 given the rising demand in the market leading to high volume of sales and high realisations. However in FY15, the industry witnessed a decline in demand following the ban imposed by Iran on import of rice. Consequently, Indian basmati rice industry reported decline in value of sales in 2014-15.
The industry remains vulnerable to inventory price risk given sizeable stock levels of the players. As witnessed in FY15, weakness in demand led to correction in prices which impacted the inventory positions of the players and hence their profitability. The decline in profitability and industry’s inability to liquidate its sizeable stocks resulted in increased working capital borrowings. Thus, the industry reported increase in leverage and weakness in coverage metrics in FY15.
The significant impact was witnessed in quarter ending March 2015 when the sales did not grow (unlike same quarters in previous years) and profitability and hence interest coverage declined significantly. This was largely driven by decline in realisations in the aftermath of ban imposed by Iran on import of rice. Further, as reflected in the first three quarters of 2015-16, the pressure on revenue and profitability is expected to continue in the near term.