India's basmati industry is expected to see revenue growth moderate to 4 percent this fiscal year, down from an impressive 20 percent last year. Despite this slowdown, revenues are projected to reach an all-time high of nearly Rs 70,000 crore, bolstered by supportive policies like the removal of the minimum export price (MEP) and increasing demand in both domestic and international markets, according to a CRISIL report.
The report highlights that strong profitability will reduce the need for debt to fund capital expenditures and replenish inventory, maintaining stable credit profiles for industry players. Analyzing 43 companies rated by CRISIL, which represent 45 percent of the Indian basmati market by revenue, supports this outlook.
On September 14, 2024, the Indian government announced the removal of the MEP, previously set at $950 per tonne, to enhance adequate domestic availability. This policy shift allows exporters to sell rice at lower price points, increasing access to international markets and potentially boosting volume.
Nitin Kansal, Director of CRISIL Ratings, noted that exports, which make up about 72 percent of basmati rice sales, are expected to grow by 3-4 percent this year. This growth is driven by countries trying to secure their food supplies during geopolitical uncertainties. Domestic sales are likely to increase by around 6 percent, thanks to demand from hotels, restaurants, and cafes (HoReCa), lower prices, and rising household incomes.
The volume of basmati rice is expected to grow by about 10 percent (around 9 million tonnes), which should help counter a nearly 5 percent drop in revenue. This revenue drop will be due to lower paddy prices, but the decrease will be limited because of steady demand.
A bigger drop in input prices is expected to increase the operating margins for basmati rice manufacturers by 50-75 basis points, reaching around 6.7-7.0% this year. Paddy prices are anticipated to fall by 10-12 percent due to a larger harvest from a normal monsoon and more land being used for sowing.
With higher paddy production, lower purchase prices, and steady demand, companies are likely to restock their supplies. These stocks had fallen to their lowest level (110-120 days) in five years because demand exceeded procurement after the pandemic. By the end of this year, inventory levels should return to normal (140-150 days). However, increased procurement will require more working capital.
Smriti Singh, Team Leader at CRISIL Ratings, stated that basmati rice companies are expected to boost their processing and packaging capacity by about 10 percent this year to meet growing demand. Debt levels are predicted to remain stable, as companies will fund their expenses and increased purchases using healthy profits. This will help maintain stable credit ratings.
CRISIL Ratings expects the gearing and interest coverage for rated basmati rice companies to be around 1.0 and 4.5 times this year, compared to 0.9 and 5.0 times on average in the past three years. Looking ahead, geopolitical factors and monsoon patterns will be crucial for the industry's trajectory.