Restriction on import of refined palm oil will safeguard the margins of domestic palm oil refiners while also improving their capacity utilisation: ICRA

India imports more than ~70% of total edible oil consumed in India, of which, palm oil is nearly entirely imported and constitutes ~40% of total edible oil consumption and ~60% of total edible oil imports in India. Recently on January 8, 2020, the Director General of Foreign Trade (DGFT), Government of India (GoI), imposed restrictions on imports of refined palm (RPO) oil through amending the import policy wherein import of RPO has been moved to "restricted" category from "free". As per an ICRA note, this announcement will positively impact domestic palm oil players - will improve their capacity utilization as well as profitability margins. This move comes a week after the scheduled reduction in import duty differential (IDD). From January 1, 2020, under the Association of Southeast Asian Nations (ASEAN) agreement and the Malaysia India Comprehensive Economic Cooperation Agreement (MICECA), the import duty on RPO was reduced to 45% from 50%, while that on crude palm oil (CPO) was reduced to 37.5% from 40% resulting in an IDD of 7.5% (compared to 10% earlier) between RPO and CPO. While the duty reduction is the final periodic revision under this agreement, the change would have significantly impacted the margins of the domestic palm oil refining industry.

Commenting on the impact of import duty reduction, Mr. K. Ravichandran, Senior Vice-President & Group Head, Corporate Ratings, ICRA, says, "As per our analysis, considering the Indian import duty and export duty of exporting countries, the effective duty protection (EDP) for CPO and RPO works out to be only ~4% in case of import from Indonesia against the earlier EDP of ~7%. Further, the EDP for Malaysia stands substantially lower at ~1.7% against the earlier EDP of almost 10%. This would have significantly impacted the margins of domestic palm oil refiners. Moreover, GOI has planned to increase domestic oil production to reduce import dependency. Hence, the move to restrict RPO imports will safeguard the interests of domestic palm oil refiners as well as oil seed growers."

Palm oil constitutes a significant proportion of the total edible oil consumption. In terms of pricing, it is the cheapest and most neutral in its characteristics for usage. Its consumption tends to increase if consumers of other oils (which are all priced at a premium of ~15-100% in the retail market) see a higher price advantage. The lowering of duty on CPO will thus result in an indirect impact on the prices of oils extracted from domestically grown oilseeds. Thus, ICRA believes that the reduction in import duty could have a negative impact on the realisations of oilseed growers and lead to further reduction in overall oilseed acreage in the long term. The offsetting factor here is that in the recent past, palm oil prices have had a significant run-up and that has elevated the realisations of all domestic edible oils by 15-30%, so the net impact could be minimal or neutral.

Adds Mr. Ankit Patel, Vice President and Co-Head, Corporate ratings, ICRA, "The capacity utilisation for the domestic palm oil refiners remained low at around ~30-40%, since ~30% of palm oil consumption was being met through direct RPO imports. Further, given the low value addition in the edible oil refining business, operating margins for palm oil refiners have inherently been thin. Hence, with the restriction on RPO imports, CPO import should increase, resulting in improved capacity utilisation levels for domestic refiners. Apart from improving the operating efficiency, it will also reduce the competition from imported RPO, giving the players' better pricing flexibility and supporting overall improvement in margins. While the step is a positive for the refiners, we expect credit metrics of the edible oil industry to remain subdued in the near to medium term, given the inherently modest profitability and high debt levels."

Source : Equity Bulls

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