Industry Risk Score

Union Bank of India

December 2014

Rice Mills
Contents

Introduction
Industry Risk Score (IRS) reflects the impact of industry variables on
the cash flows and debt repayment ability of the companies in the
industry over 3-4 years. The risk score for an industry is arrived at, by
aggregating the scores assigned to the parameters relevant for the
industry.
Industry parameters include variables such as demand-supply
outlook, cost structures, competition and financial performance. The
parameters are selected based on the extent to which they affect the
debt-servicing ability of the companies operating in the industry.
Scores on these parameters reflect the extent of positive/negative
impact on cash flows, and the degree of variability in cash flows of the
companies.
The industry risk scores have been graded on a ten-point scale, with 1
indicating high risk and 10 indicating low risk.
Risk score

Risk factors

Extremely negative

Extremely negative

Negative

Marginally negative

Neutral

Marginally positive

Positive

Positive

Highly positive

10

Highly positive

Executive summary

Background

Industry risk parameters

Demand-supply

Government policies

Input-related risk

Extent of competition

Financial risk

Annexure

RICE MILLS

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Executive summary
Rice milling is the process by which paddy is processed and converted into rice. In 2014-15, total milled rice
production is expected to decline to 102 million tonnes as the crop is affected by delayed monsoons.
Although, Area under harvesting has increased in Kharif season, we expect yields to get impacted by
delayed monsoons. Cyclone Hudhud has also affected crop in east coast in October, 2014. Various factors
influence rice production in India: climatic conditions, acreage, crop yields. Paddy is primarily a kharif crop
sown between July and October and harvested subsequently. About 15 per cent of the year's rice
production is expected to materialize in the rabi season, which is likely to be normal as its not significantly
dependent on monsoon.Ability to manage working capital is very critical for the success of rice millers. The
industry is highly capital intensive and most of the large players depends upon their brands and exports of
high quality basmati rice to Middle East countries.

Parameter

Weightage

Rice Mills : Industry risk score

Industry characteristics

Score
4.69

85.00

4.55

Demand-supply gap

25.00

5.00

Government policy

30.00

5.00

Input-related risk

30.00

4.00

Extent of competition

15.00

4.00

Industry financials

15.00

5.48

Operating margin of industry

35.00

4.60

ROCE of industry

65.00

5.95

Source: CRISIL Research

RICE MILLS

Background
Rice is an essential food crop consumed throughout India. Paddy is the main raw material for rice millers,
constituting the bulk of overall costs (raw material costs account for about 90 per cent of millers' total costs).
Rice consumption has been increasing steadily in the past few years, with growth in population and per
capita consumption. The only exception was 2009-10, when milled production declined, driving up prices
significantly, leading to a decline in consumption. Rice consumption also varies depending on the
demographics and eating habits of any particular region. South India is one of the major consumers of rice
and demand generally remains stable in this region. Rice exports are minimal, as majority of the output is
domestically consumed.

Industry risk parameters

Demand - Supply
Between 2009-10 and 2011-12, growth in yields and the area under cultivation enhanced rice production.
However, overall area under cultivation declined to 42.4 million hectre in 2012-13 due to late arrival of
monsoon. In the current crop year (July 2014 to June 2015) total milled rice production is estimated to decline
to 102 million tonnes on account of delayed monsoons. Although, Area under harvesting has increased in
Kharif season, we expect yields to get impacted by delayed monsoons.Domestic rice consumption is likely to
increase marginally by 2.5 per cent driven by population growth and rise in per capita consumption. Assuming
no major government intervention in exports, non-basmati rice exports are expected to remain stable at 7.1
million tonnes and Basmati rice exports are expected to drop to 2.8 million tonnes from 3.8 million tonnes in
2013-14 due to ban on imports from Iran in second half of 2014-15. However, we expect this ban to be one off
and may be lifted post March 2015. This would remain a monitrable for demand prospects of the sector.
Overall stock levels are expected to decline to 15 million tonnes at the end of crop year (July-June) due to
expected drop in production and increase in domestic consumption
Government policies
Many government policies are into effect to support rice industry and cater to its growth going forward. The
domestic rice industry is regulated in terms of paddy prices and rice release mechanism. Government fixes
the minimum support price for paddy each year to offer remunerative prices to farmers for their produce. Rice
off take by the Food Corporation of India (FCI) is another major policy governing this sector. FCI is the
principal organisation, which procures paddy and rice, on behalf of Government of India throughout India. FCI
procures certain varieties of rice in the form of levy share from rice millers.FCI procurement for the CY is
expected to be around 30% of total Rice production which is in line with procurement by FCI in previous
years.Additionally, the government periodically imposes restrictions on rice exports. In October 2007, the
government had issued a ban on non-basmati rice exports, in consideration of the low ending stocks. In order
to prevent exports of non-basmati rice from being sold under the basmati label, the government introduced a
minimum export price (MEP) on basmati rice in 2008. Ban on exports of non-basmati rice was revoked in
September 2011
Input - related risk
Paddy costs are a major input risk for the rice industry as this component constitutes the largest proportion of
total cost for rice millers. Raw material costs alone account for around 90 per cent of their total cost structure.
Hence, the profit margins of rice millers depend on their ability to source paddy in sufficient quantities, that
too, at the right price. Generally, rice mills are located close to areas where paddy is produced, which
reduces overall transportation cost. Paddy is primarily a kharif crop sown between July and October and
harvested subsequently. Paddy availability depends largely on the monsoons and various other factors. In
the current crop year (July 2014 to June 2015) we expect the production to be at around 102 million tonnes of
milled rice which is sufficient considering the total consumption for the country stands at 99 million tonnes and
stock level remains above minimum buffer levels. MSP of paddy for CY 2014-15 has been fixed at Rs.1360
per quintal which is 3.8% higher than previous year's MSP.

RICE MILLS

Extent of Competition
India is the world's second largest producer as well as consumer of rice after China. The Rs 2,300 billion
industry is highly fragmented with the presence of over one lakh rice mills divided into small, medium and
large units. Although the industry is witnessing the emergence of large players, following dereservation of the
industry by the government in the late 1990s, the market share of the top five players remains less than 5 per
cent.Competition is high in exports market where players are majorly branded and into basmati rice. The
requirement of higher levels of branding and marketing prowess discourages SMEs from entering the basmati
segment. In domestic market, many small players are present in this market. Assured off-take by the Food
Corporation of India (FCI), easy access to raw materials (paddy) and low capital intensity of the industry
would ensure that SMEs continue to have a large presence. Quality is lower as compared to exports market.

Financial Risk
Rice Mills: Financial parameters
Select Financial parameters

Unit

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Rs million

17557

20686

26603

29741

33564

40845

52177

Operating profit margin

Per cent

14.4

15.3

13.6

13.9

9.8

13.1

13

Return on capital employed

Per cent

22

14.4

15

11.3

16.7

13.3

14.9

Net profit margin

Per cent

4.1

5.1

3.7

8.7

6.4

Return on equity

Per cent

25.8

6.9

18.8

12.2

25.7

14.8

20.1

Interest coverage ratio

Times

1.9

1.5

2.4

2.2

3.2

2.7

3.1

Debt-equity ratio

Times

2.6

1.9

1.9

2.2

1.8

1.6

1.6

Current ratio

Times

1.2

1.2

1.2

1.2

1.3

1.3

1.3

Assets turnover ratio

Times

7.8

4.2

4.5

3.9

3.8

4.1

4.1

Raw materials days

Days

119

75

91

119

117

83

138

WIP holding days

Days

Finished goods days

Days

190

208

162

195

186

190

144

Debtors days

Days

78

37

50

66

68

52

59

Creditors days

Days

57

27

33

37

26

28

32

No

Aggregate turnover

Nos. of companies
Source: CRISIL Research

Rice Mills: Cost aggregates

Cost Structure (% of net Sales)

Unit

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Raw material cost

Per cent

74.8

72.5

78.2

77.8

79.3

78.1

79.7

Power and fuel cost

Per cent

0.9

0.7

0.7

0.7

0.7

0.6

0.6

Other operating costs

Per cent

2.5

1.8

1.9

1.3

2.8

1.8

1.4

Employee cost

Per cent

1.8

1.8

1.7

1.9

1.7

1.5

Selling cost

Per cent

5.5

7.9

3.8

4.3

5.3

4.6

3.8

No

Nos. of companies
Source: CRISIL Research

Annexure
Companies used for calculating sector aggregates
Kohinoor Foods Ltd,KRBL Ltd,LT Foods Limited,Usher Agro Ltd
These companies represent around 4.3 per cent of the industry

Rice Mills - Sector Aggregate - Interim results

(Figures in Rs Million)
Net sales
Total Operating exp
Raw Material exp
Purchase of Finished goods
Change in stock
Salaries and wages
Power & Fuel
Rent & lease rent
Selling & distribution expenses
Other expenses
OPBDIT
Depreciation
OPBIT
Interest
OPBT
Other Income
Non-op Income
Extraordinary Income/Expenses
PBT
Total Tax
Current tax
Deferred tax
FBT
Net profit
Nos. of companies

Jul-Sep
2014-15
17672.36
15183.48
12306.23
1245.02
36.35
327.95
0
0
0
1267.91
2568.09
322.68
2245.41
851.87
1393.54
79.21
7.93
-51.42
1350.05
287.85
303.75
-15.9
0
1062.19

% of
net
Sales
100 %
86 %
70 %
7%
0%
2%
0%
0%
0%
7%
15 %
2%
13 %
5%
8%
0%
0%
0%
8%
2%
2%
0%
0%
6%

Jul-Sep
2013-14
15902.14
13912.96
8501.14
710.55
3045.35
269.06
0
0
0
1386.84
2029.94
255.69
1774.24
607.3
1166.94
40.77
266.24
94.8
1527.99
329.29
333.89
-4.59
0
1198.7

% of
net
Sales
100 %
87 %
53 %
4%
19 %
2%
0%
0%
0%
9%
13 %
2%
11 %
4%
7%
0%
2%
1%
10 %
2%
2%
0%
0%
8%

Apr-Sep
2014-15
37958.02
33010.94
28579.99
1723.57
-561.39
627.25
0
0
0
2641.5
5132.24
653.82
4478.41
1879.25
2599.16
185.16
31.01
-71.12
2559.05
383.49
422.99
-39.5
0
2175.55
4

% of
net
Sales
100 %
87 %
75 %
5%
-1 %
2%
0%
0%
0%
7%
14 %
2%
12 %
5%
7%
0%
0%
0%
7%
1%
1%
0%
0%
6%

Apr-Sep
2013-14
32140.97
28136.84
19172.96
1282.55
4492.7
539.33
0
0
0
2649.29
4084.52
505.76
3578.75
1295.79
2282.96
80.39
273.15
-96.5
2459.62
572.85
577.65
-4.79
0
1886.77

% of
net
Sales
100 %
88 %
60 %
4%
14 %
2%
0%
0%
0%
8%
13 %
2%
11 %
4%
7%
0%
1%
0%
8%
2%
2%
0%
0%
6%

Companies included in interim sector aggregate

Kohinoor Foods Ltd.; KRBL Ltd.; Usher Agro Ltd.; LT Foods Limited.

RICE MILLS
Rice Mills - Business risk evaluation
Risk entity name
Operating Efficiency
Availiability of Raw Materials

Weightages
60
40

na
Management of Price Volatility

25

na
Multi Locational Advantage

15

na
Vulnerability to event risk

20

na

Market Position

40

Brand Equity

25

na
Proximity to Market

25

na
Long Term Contracts / Assured Offtake

20

na
Distribution Setup
na
Source: CRISIL Research

30

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