Increasing demand set to strengthen basmati players’ credit risk profiles: CRISIL

CRISIL believes that the credit risk profiles of India’s basmati rice companies will improve gradually over the medium term, driven by steady increase in demand for aromatic basmati rice from both the export and domestic markets. Basmati rice companies with relatively stronger capital structures will benefit more from the uptrend in demand. CRISIL has based this outlook on a study it conducted on the credit risk profiles of the numerous basmati rice companies rated by it: these players collectively account for more than 40 per cent of India’s total basmati rice export (refer to CRISIL article, ‘Increasing demand set to strengthen basmati players’ credit risk profiles’).

India’s basmati rice exports has increased sharply, at a compound annual growth rate (CAGR) of 28 per cent between 2007-08 (refers to financial year, April 1 to March 31) and 2009-10, driven by increased demand from the key importing countries (Saudi Arabia, Iran, Kuwait, and the UK) and the inclusion of new hybrid basmati rice varieties (such as PUSA-1121). These hybrid varieties, being relatively cheaper than traditional basmati varieties, have gained fast acceptability in the major export markets and have helped expand the basmati rice market. CRISIL believes that, given the insufficient rice production and the distinct preference for basmati rice in the major rice-importing countries, the demand for basmati rice from these countries will continue to increase over the medium term. As per CRISIL’s estimates, basmati rice exports from India will grow by 15 to 20 per cent to around 3 million tonnes in 2011-12. The domestic consumption of basmati rice is also expected to grow at a healthy rate of around 15 per cent per annum over the medium term, supported by increasing spending power of the middle-income sections and proliferation of branded basmati rice.

Says Mr. Gurpreet Chhatwal, Director CRISIL Ratings, “In line with the sharp demand growth, the players in the basmati rice industry have scaled up their operations, which has led to enhanced economies of scale in procurement and processing. This has resulted in an improvement in the operating profitability for most of the players.” The combined sales of CRISIL-rated basmati rice companies has increased at a CAGR of 40 per cent over the past three years and is estimated to be around Rs.70 billion for 2009-10. Over the same period, the average operating profitability of CRISIL-rated basmati rice companies has improved by 100 basis points (100 basis points equals 1 percentage points); the improvement has been sharper for large players (sales more than Rs.5 billion). Adds Mr. Chhatwal, “CRISIL-rated basmati rice players will continue to scale up operations and maintain their operating profitability at improved levels, supported by increasing offtake, thereby improving their business risk profiles over the medium term. The large players are better poised to gain from the expected growth in demand as these are preferred by large importers because of the stability in supply from them.”

However, the average consolidated gearing of CRISIL-rated basmati rice companies was high, at more than 4 times as on March 31, 2010. Says Mr. Subodh Rai, Head, CRISIL Ratings, “The financial risk profiles of most of the basmati rice player is constrained due to highly leveraged capital structures owing to working-capital-intensive operations and the seasonal nature of business, and the resultant weak debt protection indicators.” The average consolidated interest coverage ratio of the CRISIL-rated basmati rice companies was below 2 times for 2009-10. Adds Mr. Rai, “Players funding their working capital requirements with a judicious mix of equity and debt are more likely to report an improvement in their credit risk profiles over the next eighteen months.”

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