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C O N S U M E R R E L AT E D
NOMURA SINGAPORE LIMITED
Tanuj Shori +65 6433 6981 tanuj.shori@nomura.com
Aatash Shah +91 22 4037 4194 aatash.shah@nomura.com
NEW
Tushar Mohata (Associate)
THEME
R E P O R T
A N C H O R
on Ruchi Soya, India’s largest edible oil player, with a BUY. Targeting 25-30% pa * Initiating coverage
bottom-line growth and exposed to palm plantation, Ruchi should increasingly be Price as on 9 September, 2010
benchmarked to global peers, in our view. Even allowing for KS Oil’s tax raid overhang
and slower growth, its recent correction looks overdone. On the back of its leadership Analysts
of the mustard (rapeseed) market, we forecast a diluted 16% FY10-13F earnings Tanuj Shori
CAGR and initiate with BUY. Wilmar, a proxy to the Indian edible oil story through its +65 6433 6981
tanuj.shori@nomura.com
JV with Adani group, remains a BUY.
Aatash Shah
Initiate BUYs on Ruchi Soya, KS Oils; reaffirm BUY on Wilmar
+91 22 4037 4194
aatash.shah@nomura.com
We expect industry growth of 7% and branded sales growth of 25%
Tushar Mohata (Associate)
Incremental demand will be imported and has to be met by palm
Consolidation is the theme, with few players dominating the market
Nomura Anchor Reports examine the key themes and value drivers that underpin our
sector views and stock recommendations for the next 6 to 12 months.
Any authors named on this report are research analysts unless otherwise indicated.
See the important disclosures and analyst certifications on pages 73 to 76.
proxy to the Indian edible oil market with a leading presence through its JV. We
initiate coverage on the sector with a BUY on Ruchi Soya and KS Oils and reaffirm
our BUY on Wilmar.
Contents
Indian protein meal market dynamics work different from China ... 15
… as India exports ~25% of its meal production 15
Meal market in India is small, but growing 15
So the main profit driver for processors is oil, not meal 15
India – a dominant edible oil demand driver with significant oil deficit 22
India accounts for a major part of global edible oil demand 22
Indian oil consumption has grown over the years, but domestic production has
remained stagnant… 23
… resulting in lower import tariffs and higher imports 23
Indian oilseed production has only increased marginally; however, share of global
production has remained stable 24
Area under soybean cultivation has increased; yields still low 24
Until India becomes self-sufficient in oilseed output, incremental imports are
going to fulfil edible oil demand 25
Imports of oilseeds in India is almost non-existent due to policy restrictions and
lack of a viable meal market 25
… however, the government may have to revisit restrictions if it wants to reduce
edible oil import dependence… 26
... which will be a positive for local processors in our view 26
Others,
71.1mn mT EU-27,
23.7mn mT
India,
15.6mn mT
Peanut, 9%
Sunflowerseed, 5%
Executive summary
Exhibit 2. Indian edible oils vs Index performance Exhibit 3. Edible oil companies relative performance
(%) Ruchi Soya KS Oils (%) Ruchi Soya KS Oils Wilmar
60 Sensex BSE Midcap 60
50 50
40 40
30 30
20 20
10
10
0
0
(10)
(10)
(20)
(20)
(30)
(30)
May-10
Mar-10
Jan-10
Feb-10
Apr-10
Jun-10
Jul-10
Aug-10
Sep-10
May-10
Mar-10
Jan-10
Feb-10
Apr-10
Jun-10
Jul-10
Aug-10
Sep-10
Source: Company data, Nomura estimates Source: Company data, Nomura estimates
25 21
19
20
17
+1SD=13.9 +1SD=13.9
15 15
13
Average=11.4
10 Average=9.1
11
9
5 -1SD=8.9
-1SD=4.3 7
0 5
May-07
May-08
May-09
May-10
Nov-07
Mar-08
Nov-08
Mar-09
Nov-09
Mar-10
Jan-07
Sep-07
Jan-08
Sep-08
Jan-09
Sep-09
Jan-10
Jul-07
Jul-08
Jul-09
Jul-10
Source: Company data, Nomura estimates Source: Company data, Nomura estimates
1.4 1.4
1.2 1.2
1.0 +1SD=0.9 1.0 +1SD=0.9
0.8 0.8 Average=0.7
0.6 Average=0.4
0.6
0.4
0.4 -1SD=0.5
0.2
-1SD=0 0.2
0.0
0.0
(0.2)
Nov-07
Mar-08
Nov-08
Mar-09
Nov-09
Mar-10
Jul-07
Jul-08
Jul-09
Jul-10
May-07
May-08
May-09
May-10
Jan-07
Sep-07
Jan-08
Sep-08
Jan-09
Sep-09
Jan-10
Source: Company data, Nomura estimates Source: Company data, Nomura estimates
Indian edible oil demand is set to rise from 16mn MT now to 30mn MT by 2020, more Transition from unbranded to
than China’s market size of today, implying a CAGR of 7%. More importantly, with branded market
increasing quality consciousness, rising incomes and consolidation, industry experts
suggest branded sales are likely to grow at ~25-30% over the next few years. Branded
sales of edible oil in India at ~US$4bn comprise only about 25% of the total edible oil
market of INR750bn (~US$16bn), with most of the lower income consumers opting for
cheaper oils sold in loose form. But as per our calculations, branded sales will
represent ~55-60% of the total market by 2015F.
30
25
20
15
10
Mexico
Brazil
United
Indonesia
China
Argentina
Pakistan
Russia
Japan
India
States
420
800
600
563
400 Branded CAGR =
25-30% 632
200
188
0
2010 2015F
As demand increases for edible oils, although at some stage, the government might
have to rethink its seed policy to allow higher yields from imported GMO seeds to fulfil
this demand, but in the near-medium term, India will rely more on palm and soybean
oil imports to fulfil this demand.
As acreage opportunities are limited in other crops, most of this demand growth will
have to be satisfied by palm oil (expected to grow at ~20% CAGR). Thus the players
with refining / upstream exposure to palm will stand to gain market share and volumes
in our view.
Exhibit 10. Monthly crude palm oil imports Exhibit 11. Monthly crude soybean oil imports
('000 mT) ('000 mT)
India total CPO imports
600 350 India total Crude Soy oil imports
500 300
250
400
200
300
150
200
100
100 50
0 0
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Source: Solvent Extractors Association of India Source: Solvent Extractors Association of India
One who moves fast will make money fast; Ruchi Soya, KS Oils
and Adani Wilmar likely to be key beneficiaries
The leading players have all invested heavily into building additional capacities over
the last few years and continue to invest in refining and crushing capacity generation.
We think players like Ruchi Soya, KS Oils, Adani-Wilmar, can benefit from likely
industry dynamics in two ways: 1) from increasing capacity utilisations and
2) consolidation in the industry, and will likely capture all the incremental industry
growth, in our view.
Operators such as KS Oils, Ruchi Soya, Adani-Wilmar should be able to grab market The branded players should be
share from the unorganised sector, which is unlikely to be able to compete with them able to muscle out the
in terms of sourcing capability, quality factors and the like. This will lead to unorganised sector
We value Ruchi Soya at 15x FY12F P/E (CY11), which is at a discount to Wilmar (our
implied target P/E for Wilmar is ~16.5x CY11 earnings). Its discount to Wilmar is
justified, in our view, because of lower scale despite the fact that earnings trajectory for
Ruchi Soya should be much higher than Wilmar. We value it at a premium to the
average of midstream to account for high earnings growth and the fact that it is a
leading player in high-margin downstream branded segment, as Indian and Chinese
consumer names typically trade at 20x-plus their forward earnings. We also add back
plantation business value of INR35/share, where they have already planted 32,000ha
of palm oil land in India, and have acquired a total plantable landbank of 169,000ha.
We also see significant capex opportunity with the prospect of acquisition or Greenfield
investments in palm plantations in Africa or Indonesia.
We value KS oils at 12x FY12F EPS, at a discount to Ruchi Soya to account for near-
term headwinds owing to tax concerns and a lower planned capacity expansion over
the next few years. KS Oils is mostly focusing on increasing market share in mustard
and is not significantly adding new capacity in refining. On PEG, Ruchi Soya is trading
at 0.5x, at midcycle valuations while KS Oils is trading at 0.4x, at a significant discount
to historical mid-cycle valuations.
Note: Pricing as on 9 September, RSI IN and KSO IN’s values are for calendar year
Source: Company data, Nomura estimates
Note: Pricing as on 9-Sep, RSI IN and KSO IN’s values are for calendar year
Source: Company data, Nomura estimates
Indian edible oil demand has grown with population and income;
still significantly below world average
Per capita consumption of vegetable oils in India has increased by 30% from India has seen per capita income
~10kg/year in 2001 to ~13kg/year in 2010, underpinned by a 132% growth in per rise by 132% since 2001; and this
extra money is going to fuel
capita income to US$1,000 over the period. Overall demand for edible oils has risen by
consumption
40% as a result to about 15.6mn mT, second only to China at 27mn mT. However,
Indian per capita consumption still lags significantly below the world average of
22kg/year, even to that of developing neighbours such as China and Pakistan at
20kg/year.
Exhibit 16. Consumption vs population growth Exhibit 17. Per capita consumption v income growth
2002
2003
2004
2005
2006
2007
2008
2009
2010F
2011F
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010F
2011F
Note: Does not include fats like butter etc Note: Does not include fats like butter etc
Source: USDA FAS, IMF Source: USDA FAS, IMF
Indian edible oil market can top where China is now in the next
10 years
As shown below, Indian per capita consumption is still significantly below levels in
other developing countries, mainly because of lower household incomes, and a small
urban population in proportion to the overall population, in our view. As per industry
estimates, the proportion of Indian middle-class, (which has adequate purchasing
power for consumer staples like edible oils), is expected to rise from 5% of population
in 2007 to 40% by 2025. We think this would lead to India’s per capita oil consumption
reaching levels of other countries like China. As per our estimates, assuming a 1.3%
growth of population, and per capita consumption levels of ~22kg/year, India’s total
edible oil market size can be ~30mn mT, by 2020F which, is more than China today.
18 Pakistan
Russia
16
14 Mexico
12 India
10
0 2,000 4,000 6,000 8,000 10,000 12,000
GDP/capita (US$)
We estimate Indian per capita consumption will equal the current world average in the
next 10 years, and the total consumption of edible oil is expected to double from 16mn
mT currently to 30mn mT by 2020F, which implies a CAGR of 7%.
India is going to meet most of edible oil deficit through palm oil
India’s total edible oil consumption is expected to grow at a CAGR of 8.6% over India’s edible oil import deficit will
2007-11F. Most of this incremental oil demand is going to be met by palm oil, whose be met by imports of palm oil, in
our view
share in Indian oil consumption has grown from 31% in 2007 to 46% in 2011F.
Demand for other major oils like soybean and rapeseed, is expected to remain more or
less flat, as we think it is unlikely that there will be a significant change in crop area or
yields, over the near term. We believe this is the reason why all major edible oil players
in India have ventured into oil palm cultivation over the last few years, to reduce
dependency on imports and backward integration.
Exhibit 21. Indian oil demand is increasing … Exhibit 22. Share of palm in consumption is growing
(000 mT) Palm Soybean (%) Palm Soybean Rapeseed Peanut Others
18,000 Rapeseed Peanut 100
Cottonseed Sunflowerseed 90 18 16 17 16 15
16,000
Other 80 9
14,000 12 12 10 9
70 14 14
12,000 15 14
60 18
10,000 16
50 16 17
18
8,000 21
40
6,000 30
4,000 20 44 43 46
39
31
2,000 10
0 0
06/07 07/08 08/09 09/10F 10/11F 06/07 07/08 08/09 09/10F 10/11F
As per the ERS department of the USDA, Indian soybean meal offers better price and
quality competitiveness in the world markets than other Indian meals. This is partly due
to the fact that soybeans are a relatively new crop in India, and so most of the
processing facilities are relatively modern and technologically advanced, as opposed
to mustard, which have been there since decades.
(1,000) 10,000
(2,000) 0
May-08
May-09
May-10
Mar-08
Nov-08
Mar-09
Nov-09
Mar-10
Jan-08
Jul-08
Sep-08
Jan-09
Jul-09
Sep-09
Jan-10
Jul-10
Sep-10
Source: Bloomberg, Nomura research
Note: 1. Solvent extraction is used for raw materials, such as soybeans, cottonseed, and expeller oilcake with less
than 20% oil content
Source: ERS Report on Indian Agriculture, Nomura research
2
Solvent extraction 711 36 157 40-50
Vanaspati 241 4.8 66 35
Oil refining 585 4.7 20 35
Note:
1 Capacity and use based on raw material; 300 days/year, 24 hours/day basis.
2 Includes expander units.
Ghanis are very small scale oilseed crushers; Vanaspati = hydrogenated oil
Number of refiners and solvent extractors have come down in the last 5 years, from 800 and 766 respectively
Source: ERS Report: “The role of policy and industry structure in India's Oilseed Markets”
We think larger players like Ruchi Soya, KS Oils, Adani-Wilmar can benefit in two ways: The larger players stand to gain
1) from increasing capacity utilisation and 2) consolidation in the industry, and will the most
likely capture all the incremental growth in our view.
Exhibit 28. Marginal oilseed processing cost decreases with higher utilisation
Rapeseed Soybeans Groundnuts Sunflower
Cost (INR/mT) 30% 50% 100% 30% 50% 100% 30% 50% 100% 30% 50% 100%
Power 325 215 210 150 333 275 210 150
Steam 155 65 150 90 175 100 150 90
Hexane 125 70 134 100 108 55 134 100
Labour 255 195 128 100 210 140 128 100
Interest 156 156 120 96 157 157 120 96
Other 170 170 58 25 130 130 108 75
Total 1,186 871 680 800 561 375 1,112 857 696 850 611 425
% cost savings 27 43 30 53 23 37 28 50
Note: Breakup of cost for 100% utilisation is unavailable
Source: ERS Report, World Bank
420
800
600
563
400 Branded CAGR =
25-30% 632
200
188
0
2010 2015F
As per industry data, only about 31% of urban households and about 9% of rural Millions are climbing out of
households consume branded edible oils, with the national average at ~16%. This poverty and becoming
consumers
represents a significant untapped opportunity, with a potential to grow to US$13.5bn
by 2015F. We believe established players with scale like Ruchi Soya and KS Oils will
be the key beneficiaries of this deeper penetration.
40 80.0%
72.0%
56.0% 52.0%
20
% 0
1995-96 2001-02 2007-08 2009-10F
Exhibit 35. Total vegetable oil consumption (mn mT) Exhibit 36. Total vegetable oil imports (mn mT)
07-11F 07-11F
06/07 07/08 08/09 09/10F 10/11F CAGR (%) Imports 06/07 07/08 08/09 09/10F 10/11F CAGR (%)
China 22.6 23.3 24.7 27.2 29.8 7.2 China 8.5 8.8 9.8 9.7 10.9 6.4
EU-27 21.7 22.4 23.1 23.7 24.1 2.7 India 5.4 5.9 8.8 8.7 9.4 14.6
India 11.8 13.0 14.8 15.6 16.5 8.6 EU-27 9.0 9.0 9.1 8.5 8.8 (0.5)
Others 63.2 67.1 67.9 71.1 73.8 4.0 Others 24.1 27.2 26.6 28.2 29.1 4.9
Total 119.3 125.9 130.4 137.6 144.2 4.9 Total 47.0 50.9 54.2 55.1 58.2 5.5
India % of total 9.9 10.3 11.3 11.4 11.4 India % of total 11.6 11.6 16.2 15.8 16.1
Source: USDA FAS Source: USDA FAS
Indian oil consumption has grown over the years, but domestic
production has remained stagnant…
Over 2004/09, local production of vegetable oils in India has seen a CAGR of only The demand supply gap is rising
0.2%. On the other hand, consumption has grown 6% annually, resulting in a widening
demand production gap. We estimate a production deficit of 9.3mn mT in 2010/11F, up
135% since 2003/04, and think that this deficit will widen over the medium-long term.
Exhibit 39. Indian edible oil import duties Exhibit 40. Total oil imports
Jan/01
Jan/02
Jan/03
Jan/04
Jan/05
Jan/06
Jan/07
Jan/08
Jan/09
Jan/10
03/04
04/05
05/06
06/07
07/08
08/09
09/10F
10/11F
Exhibit 41. India: total oilseed production Exhibit 42. India: what constitutes total output
(09/10)
(mn mT) (%)
36 India (LHS) India % of world (RHS) 9.0
35
8.5 Argentina Others
34 Cottonseed
12% 29%
2%
33 8.0
32
31 7.5 Soybean
India 2%
30 China
7.0 13% 8% Rapeseed
29 1%
28 6.5 Peanut
27 1%
26 6.0 USA Sunflowerseed
Brazil 24% Other
0%
03/04
04/05
05/06
06/07
07/08
08/09
09/10F
10/11F
16% 0%
Source: FAOStat
Exhibit 44. India soybean yields: low Exhibit 45. India rapeseed yields: low
(mT/ha) Brazil (mT/ha) Brazil
3.5 China 2.5 China
India India
3.0 United States of America United States of America
2.0
2.5
2.0 1.5
1.5
1.0
1.0 Low rapeseed yields
Low soy yields 0.5
0.5
0.0 0.0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: FAOStat Source: FAOStat
Exhibit 46. Indian edible oil imports: palm leads the way
(000 MT)
Palm Soybean Sunflowerseed Rapeseed Other
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10F 10/11F
protect its organic farming status in oilseeds. Also an 2002 Plant Quarantine Order
states that all imports should be certified pest-free and seeds should be “de-vitalised”
(ie, cannot be used for growing crop). This is done to protect local oilseed farmers, but
makes the cost of shipped soybeans prohibitively high. Also, if seeds are devitalised
by splitting them at the point of origin, they can degrade in quality during shipping.
India also does not have a viable meal market, and exports about 25% of its oil meal
output. Lack of a local market and meal being one of the end products of crushing
reduces the profitability of crushing locally. All these reasons make oilseed imports
unfeasible and minimal, in our view.
Domestic consumption of edible oils is expected to grow at 8.6% annually over 2007-
11F, outstripping production growth at only 2.7%, implying imports need to grow at a
much faster rate (~15%) to address the demand.
As per USDA estimates, most of this demand growth will come from palm oil, (~20% Demand growth is expected to be
CAGR), whereas mustard and soybean oil consumption will grow at only 1-2% pa. met by palm oil
Stock usage ratios for Indian oils remain very low, partly due to the oil deficit status of
the country.
We think this puts mustard oil and soybean oil producers like Ruchi Soya and KS Oils Mustard and soybean oil are
in a sweet spot in case health becomes a deciding factor for the purchase. This is perceived to be healthier than
palm
likely to be the case in affluent Indian households, which are increasing in number.
These companies also produce branded sunflower oil for urban markets.
Saturated Fat Monosaturated Fat Omega 3 Polyunsaturated Fat Omega 6 Polyunsaturated Fat
Coconut Oil 91 7 02
Palm Oil 51 39 0 10
Lard 43 47 1 9
Cottonseed Oil 27 19 0 54
Peanut Oil 19 48 0 33
Oilive Oil 15 75 1 9
Soybean Oil 15 23 8 54
Corn Oil 13 29 1 57
Sunflower Oil 12 16 1 71
Flaxseed Oil 9 16 57 18
Safflower Oil 8 77 1 14
Mustard Oil 7 61 11 21
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Note: Health benefits increase from left to right, ie Monosaturated fat is better for health than saturated fat; Source: KS Oils corporate presentation
Although the companies have recently ventured into each other’s territories, with Ruchi The companies have recently
Soya entering mustard oils through its Mahakosh and Ruchi Gold brands and KS Oils diversified into each other’s
territories
producing Kalash Soybean Oil, we think it will take time for them to make a reasonable
impact on the other’s market, given their leadership position. We also think there is
less likelihood of Indian consumers with taste peculiarities to shift from one oil to the
other (eg, fish and pickle can only be cooked in mustard oil due to its pungency and
preservative properties respectively).
Note: Shaded region represents oilseed production belt of Rajasthan and Madhya Pradesh; Sunflower oil is mostly
consumed in urban areas in small quantities
Source: KS Oils presentation
This along with the fact that processing cost in palm oil are lower than other oils, has
led to most players like Ruchi Soya and KS Oils establishing or acquiring palm refining
capacity, in our view.
Exhibit 52. SEA forecast for Indian imports in 2015 Exhibit 53. Current import duties on edible oils
(mn mT) 2015 Edible oils Duty (%) Non Edible oils Duty (%)
Total edible oil demand 22.5 Crude Crude Palm Stearin 19.57
Total area under oilseeds (mn ha) 30 Crude palm oil / olein 0 Crude Palm Kernel Oil 17.37
Yield (mT/ha) 1.3 Crude sunflower oil 0 Palm Fatty Acid Distillate 32.76
Production of oilseeds 42 (P.F.A.D.)
Domestic supply of edible oils 12.5 Crude rapeseed oil 0 Palm Kernel Fatty Acid 32.76
Distillate (P.K.F.A.D.)
Total edible oil imports required 10
DG Soybean oil 0 Spilt Palm Kernel Fatty 32.76
Imports as share of demand (%) 44 Acid
Source: Company presentation Refined
Vanaspati 12.03
Refined palm oil/RBD 7.73
palmolein
Refined rapeseed oil 7.73
Refined sunflower and 7.73
other oils
Refined soybean oil 7.5
Source: SEA of India
Exhibit 54. Monthly crude palm oil imports Exhibit 55. Monthly crude soybean oil imports
('000 mT) ('000 mT)
India total CPO imports
600 350 India total Crude Soy oil imports
500 300
250
400
200
300
150
200
100
100 50
0 0
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Source: Solvent Extractors Association of India Source: Solvent Extractors Association of India
Exhibit 56 below shows that soybean oil imports are typically at their highest levels in
June-October, after the harvest season. A shortage of soybean oil post the South
American drought in 2008-09 decreased soybean oil imports and pushed prices up.
300
250
200
150
100
50
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Palm oil prices (CIF Mumbai) has historically traded at a 16% discount to soybean oil,
in line with global averages, until recently when the discount has narrowed to ~5%
since March. This explains the recent drop in CPO imports, which have picked up only
in June due to anticipated festive demand.
Exhibit 57. CPO imports fall when discount narrows and vice versa
(000 MT) (%)
India Crude Palm Oil Imports
600 5
CPO discount to soybean oil (RHS)
0
500 (5)
(10)
400 (15)
(20)
300
(25)
200 (30)
(35)
100 (40)
(45)
0 (50)
May-07
May-08
May-09
May-10
Mar-07
Nov-07
Mar-08
Nov-08
Mar-09
Nov-09
Mar-10
Jul-07
Sep-07
Jan-08
Jul-08
Sep-08
Jan-09
Jul-09
Sep-09
Jan-10
Jul-10
Source: Bloomberg, SEA of India, Nomura research
Mar-08
Mar-09
Mar-10
Dec-06
Jun-07
Sep-07
Dec-07
Jun-08
Sep-08
Dec-08
Jun-09
Sep-09
Dec-09
Jun-10
Source: Bloomberg
(Rs/mT)
Soybean oil refining margins
12,000
Palm oil refining margins
10,000
8,000
6,000
4,000
2,000
0
(2,000)
May-09
May-10
Mar-09
Nov-09
Mar-10
Jan-09
Feb-09
Apr-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Dec-09
Jan-10
Feb-10
Apr-10
Jun-10
Jul-10
Aug-10
Sep-10
Source: Bloomberg, Nomura research
Exhibit 60. Ruchi Soya and KS Oils in the oil palm industry
Ruchi Soya KS Oils
Palm refining Plans to expand palm refining Acquired a port based refinery in
capacity by 1mn mT/year to 3.1mn Haldia with a capacity of 500mT/day
mT by 2012. for INR1500mn.
Setting up an additional 1000mT/day
palm refining operation at its
Patalganga plant.
Palm cultivation After the acquisition of Palm Tech It currently has about 750ha of
India early this year, has rights to planted plasma plantations in
develop ~169,000ha of palm land in Indonesia and is targeting planting
India. about 36,000ha in medium term
years.
Mustard meal has a 37% protein content (lower than soymeal with a 48% protein
content). Thus, it sells at a discount to soybean meal. The price of mustard DOC is
INR11/kg (US$220/mT) whereas soybean DOC is INR17/kg (US$340/mT). The cost of
raw mustard is INR22,000-25,000/mT (US$440-500/mT). Prices are lowest during
February-March harvesting season.
65
55
45
35
25
15
Dec-03
Apr-04
Aug-04
Dec-04
Apr-05
Aug-05
Dec-05
Apr-06
Aug-06
Dec-06
Apr-07
Aug-07
Dec-07
Apr-08
Aug-08
Dec-08
Apr-09
Aug-09
Dec-09
Apr-10
Aug-10
Source: Bloomberg
Soybean oil
Exhibit 64. Soybean oil refining margins (US$/mT) — Exhibit 65. Soybean crushing margins (US$/mT) —
global global
May-10
May-09
May-10
Mar-09
Nov-09
Mar-10
Mar-09
Nov-09
Mar-10
Jan-09
Jul-09
Sep-09
Jan-10
Jul-10
Sep-10
Jan-09
Jul-09
Sep-09
Jan-10
Jul-10
Appendix
Note: India directly imports degummed soybean oil as it avoids the need for a separate
gum storing facility (gum yield = 2%) and gum precipitates during transport in contact
with sea breeze.
Note: Bleaching in palm to remove colour pigments is done simply by heating, and this
is one reason palm refining margins are better.
Vanaspati is solid hydrogenated fat, made by solidifying and blending 50% refined
palm oil, 40% olein, and 10% refined sunflower oil and refined soybean oil. In India
there is no blended oil market.
Source: Nomura research, Courtesy KS Oils Source: Nomura research, Courtesy KS Oils
Exhibit 69. Mustard oil preparation Exhibit 70. Packaged mustard oil
Source: Nomura research, Courtesy KS Oils Source: Nomura research, Courtesy KS Oils
Exhibit 71. Crude (R) and refined (L) palm oil Exhibit 72. Ruchi Soya’s 3 different retail oil packs
Source: Nomura research, Courtesy Ruchi Soya Source: Nomura research, Courtesy Ruchi Soya
Exhibit 73. Soya DOC chunks Exhibit 74. Mandi (farmer selling mustard seed)
Source: Nomura research, Courtesy Ruchi Soya Source: Nomura research, Courtesy KS Oils
KS Oils has sharply underperformed the Sensex ytd on a tax-related probe that Price target Rs67.0
began in March. Although the issue may remain a near-term overhang, the
Upside/downside 31.2%
correction seems overdone, in our view, as the stock is trading near its historical
Difference from consensus -7.4%
low valuations although there has been no probe finding as of yet. As the leader in
India’s mustard industry, earnings should remain solid driven by increasing capacity FY12F net profit (Rsmn) 2,471
utilisation in mustard, expansion in soybean and palm refining, and maturing of Difference from consensus -31.3%
palm plantations in Indonesia. Initiate with a BUY rating. Source: Nomura
Catalysts
Nomura vs consensus
The stock may re-rate on any positive development on the tax issue, along with
continued earnings growth, or any asset tie up in the palm space, in our view. We think consensus is not
meaningful as coverage is thin and
Anchor themes
infrequently updated. We believe the
Dependence on oil imports will remain a key theme. Industry consolidation and information flow to investors is still
increasing branded sales should help larger players capture market share. very limited.
May10
Sep09
Oct09
Apr10
Jun10
Jul10
Aug10
Exhibit 75. KS Oils vs Indian markets Exhibit 76. KS Oils vs Commodity Prices
(%) Ruchi Soya KS Oils (%) KS Oils MPOB Palm Oil
60 Sensex BSE Midcap 140 Crude Soybean Oil Mustard oil
50 120
40 100
30 80
20 60
10 40
0 20
(10) 0
(20) (20)
(30) (40)
May-10
May-09
May-10
Mar-10
Mar-09
Nov-09
Mar-10
Feb-10
Jan-10
Apr-10
Jun-10
Jul-10
Aug-10
Sep-10
Jan-09
Jul-09
Sep-09
Jan-10
Jul-10
Sep-10
Source: Bloomberg Source: Bloomberg
Also, the PE exit was partial, and it was the sell down of the fund’s round 1 investment
that was made some four years back and was led by closure of the involved fund. The
investor still has more seed money invested in the company, implying to us that the
exit was rooted in corporate governance concerns. As shown in the following exhibit,
private equity players CVC, Barings, New Silk Route and others (GDR in round 2) are
still invested in the company.
Exhibit 77. KS Oils: Equity raising through private equity, GDRs and promoter infusion
Round 1 (2006) Round 2 (2007) Round 3 (2009) Overall Stake of
Amount Stake of Amount Stake of Amount Stake of fully diluted share
(INRmn) current (%) (INRmn) current (%) (INRmn) current (%) base(%)
1 1 2 2 3 3 5
Citi Venture Capital 900 11.3 4 0.0 490 2.0 13.3
2 2 3 3
Barings 900 4.9 490 2.0 6.8
New Silk Route 1,953 9.1 9.1
2 2
GDR 2,088 11.3 11.3
4 4
Promoters 414 5.2 1,000 5.4 1,570 6.5 17.1
Total 1,314 16.5 3,992 21.5 4,503 19.5
Note:
1. Citi Venture Capital exited Round 1 stake in July 2010 due to closing of its fund. It still holds the round 2 and round 3 investments
2. Other private equity investors have invested in the company through the GDR
3. Warrants issued but not converted yet
4. Till date, warrants for an amount of INR897 mn (3.7%) out of a total of INR1570mn are still unconverted
5. Is currently ~2% after selling off round 1 stake
Potential dilution after all outstanding warrants are converted by CVC, Barings and promoters is ~10% which is already built into our numbers
Source: Company data, Nomura research
Exhibit 78. KS Oils: forward P/E Exhibit 79. KS Oils: forward P/B
21 4.0
19 3.5
17
3.0
15 +1SD=13.9 +1SD=2.4
2.5
13
Average=11.4 Average=1.9
2.0
11
1.5
9
-1SD=8.9 1.0 -1SD=1.3
7
5 0.5
Nov-07
Mar-08
Nov-08
Mar-09
Nov-09
Mar-10
Nov-07
Mar-08
Nov-08
Mar-09
Nov-09
Mar-10
Jul-07
Jul-08
Jul-09
Jul-10
Jul-07
Jul-08
Jul-09
Jul-10
Source: Company data, Nomura estimates Source: Company data, Nomura estimates
Although KS Oils is one of the highest-margin earners in the Indian edible oil space,
due to its presence in the premium mustard oil market, we believe there is still room for
expanding margins over the medium term, with improving utilisation. (KS Oils’ FY10
adjusted net margins at 4.4% were significantly above Ruchi Soya’s at 1.3%.) We think
strong volume ramp-up as the company gains market share from other mustard oil
competitors in newer markets, along with sequential improvement in operating
statistics, will lead the re-rating.
We think KS Oils is still scouting for opportunities in the palm space, which could help
its sourcing capabilities. Any positive newsflow on this should act as a catalyst for the
stock to bounce back, in our view.
KS Oils plans to have 20% market share of India’s mustard oil industry over the
medium to long term. It currently has an 11% market share, up from 2% just four to five
years ago. To put things in perspective, KS Oils has total mustard oil processing
capacity of 4,400mT/day, whereas its nearest competitor, Gokul Refoils, has
~690mT/day).
KS Oils is one of six solvent extractors in India (out of ~600) with the knowledge to
extract an additional 7% mustard oil from the mustard cake. This helps the company in
generating incremental returns on the same mustard seed cost.
India’s mustard oil market is supply constrained, and growth will also likely be India’s mustard oil market is
supply constrained, and growth
restricted by the mustard output in the country. As a result, first movers like KS Oils —
will also likely be restricted by the
who have significant presence and capacity (4x the next competitor Gokul Refoils) in mustard output in the country
the industry — will be the first beneficiaries of any industry shift from “unorganised” to
branded sales
45
40
35
30
May-09
May-10
Mar-09
Nov-09
Mar-10
Feb-09
Jan-09
Apr-09
Jun-09
Aug-09
Sep-09
Oct-09
Dec-09
Feb-10
Apr-10
Jul-09
Jan-10
Jun-10
Aug-10
Sep-10
Jul-10
Source: Bloomberg
Exhibit 81. FY06 revenue breakdown Exhibit 82. FY10 revenue breakdown
Solvent Solvent
extraction extraction
and others and others
11% 21%
Mustard oil
Vanaspati Vanaspati 41%
14% 1%
Mustard oil
Refining 60%
15%
Refining
37%
Exhibit 83. Branded sales as % of turnover has Exhibit 84. Proportion of retail packs as % of
remained constant, but grown in abs terms turnover has grown
(Rsmn) Branded Non-branded (%) Retail packs Loose oils
40,000 120
35,000
100
30,000
80
25,000
65
20,000 60
90
15,000
40
10,000
20 35
5,000
10
0 0
FY06 FY10 FY06 FY10
Financial analysis
Revenue and earnings to grow on improving capacity utilisation
We look for KS Oils’ revenues and net income to grow on improving capacity utilisation Keep
We margin
expect comments
strong short
revenue andand
at the company’s new mustard capacity. We expect capacity utilisation in mustard to use them growth
earnings to highlight
backedoneby
or two
paragraphsmargins
improving on a page
increase from 45% now to ~70% over the next three to four years, in line with its
previous utilisation of 75% before capacity expansion. Overall, we estimate this will
lead to an FY10-13F revenue CAGR of 14.6% and core earnings CAGR of 19%.
FY06
FY07
FY08
FY09
FY10
FY11F
FY12F
FY13F
FY05
FY06
FY07
FY08
FY09
FY10
FY11F
FY12F
FY13F
Source: Company data, Nomura estimates Source: Company data, Nomura estimates
Exhibit 87. Net margin (%) Exhibit 88. EBIT margin (%)
(%) (%)
7 12
6 10
5
8
4
6
3
4
2
1 2
0 0
FY05
FY06
FY07
FY08
FY09
FY10
FY05
FY06
FY07
FY08
FY09
FY10
FY11F
FY12F
FY13F
FY11F
FY12F
FY13F
Source: Company data, Nomura estimates Source: Company data, Nomura estimates
FY06
FY07
FY08
FY09
FY10
FY05
FY06
FY07
FY08
FY09
FY10
FY11F
FY12F
FY13F
FY11F
FY12F
FY13F
Source: Company data, Nomura estimates Source: Company data, Nomura estimates
FY06
FY07
FY08
FY09
FY10
FY05
FY06
FY07
FY08
FY09
FY10
FY11F
FY12F
FY13F
FY11F
FY12F
FY13F
Source: Company data, Nomura estimates Source: Company data, Nomura estimates
FY08
FY09
FY10
FY07
FY08
FY09
FY10
FY11F
FY12F
FY13F
FY11F
FY12F
FY13F
Source: Company data, Nomura estimates Source: Company data, Nomura estimates
Investment risks
Delay in ramp-up of capacity utilisation
We are building in capacity utilisation ramp-up to drive KS Oils’ volume and earnings Delay in capacity utilisation
growth. Any substantial delay in improving capacity may affect our processing volumes ramp-up, slow margin expansion
and competition remain key risks
and have an adverse effect on earnings.
Appendix
Company background
KS Oils has an 11% market share in the overall mustard oil segment with a dominant
25% market leadership in branded mustard oil. It employs 3,000 people over its six
manufacturing plants and marketing offices and plantations in India, Malaysia,
Indonesia and Singapore.
Location of plants
Shareholding structure
Non Institutional
36% Promoter
41%
MF/ UTI
2%
Note: As of date, the percentages will be different due to CVC selling off its round 1 stake
Source: Company filing
Financial statements
Income statement (Rsmn)
Year-end 31 Mar FY09 FY10 FY11F FY12F FY13F
Revenue 31,682 40,960 48,460 55,187 61,960
Cost of goods sold (25,896) (33,905) (40,153) (45,657) (51,195)
Gross profit 5,786 7,056 8,307 9,530 10,764
SG&A (2,574) (2,834) (3,353) (3,819) (4,287)
Employee share expense
Operating profit 3,212 4,221 4,953 5,711 6,477
Growth (%)
Revenue 54.9 29.3 18.3 13.9 12.3
EBITDA 58.5 36.5 19.4 16.0 12.9
EBIT 54.8 31.4 17.3 15.3 13.4
Normalised EPS 8.2 (8.4) 18.4 15.5 23.1
Normalised FDEPS 19.0 (8.3) 9.3 15.5 23.1
Per share
Reported EPS (Rs) 4.8 5.7 5.2 6.0 7.4
Norm EPS (Rs) 4.8 4.4 5.2 6.0 7.4
Fully diluted norm EPS (Rs) 4.8 4.4 4.8 5.6 6.9
Book value per share (Rs) 26.7 28.8 35.8 42.8 51.3
DPS (Rs) 0.2 0.2 0.3 0.3 0.4
Source: Nomura estimates
Cashflow (Rsmn)
Year-end 31 Mar FY09 FY10 FY11F FY12F FY13F
EBITDA 3,483 4,753 5,677 6,588 7,438
Change in working capital (4,378) (2,348) (1,908) (1,737) (1,787)
Other operating cashflow 3,785 (423) (1,059) (1,223) (1,505)
Cashflow from operations 2,889 1,982 2,709 3,627 4,146
Capital expenditure (4,052) (2,048) (2,423) (750) (750)
Free cashflow (1,163) (66) 286 2,877 3,396
Reduction in investments - - - - -
Net acquisitions
Reduction in other LT assets (1,829) - - - -
Addition in other LT liabilities 629 - - - -
Adjustments (549) 103 99 126 228
Cashflow after investing acts (2,911) 37 385 3,003 3,624
Cash dividends (84) (106) (125) (145) (178)
Equity issue 24 - 86 - -
Debt issue 6,492 1,500 1,000 (250) -
Convertible debt issue - - - - -
Others (4,293) (1,175) (1,074) (1,588) (1,527)
Cashflow from financial acts 2,139 219 (112) (1,983) (1,705)
Net cashflow (772) 256 273 1,021 1,919
Beginning cash 1,504 732 988 1,260 2,281
Ending cash 732 988 1,260 2,281 4,200
Ending net debt 8,608 9,851 10,579 9,308 7,389
Source: Nomura estimates
Liquidity (x)
Current ratio 2.94 3.01 3.06 3.21 3.43
Interest cover 4.9 2.9 2.8 2.8 3.4
Leverage
Net debt/EBITDA (x) 2.47 2.07 1.86 1.41 0.99
Net debt/equity (%) 94.1 83.7 72.2 53.2 35.2
Activity (days)
Days receivable 13.1 12.3 12.8 13.1 13.2
Days inventory 99.8 120.8 125.9 128.4 128.8
Days payable 46.8 47.3 49.2 50.2 50.4
Cash cycle 66.1 85.9 89.5 91.3 91.6
Source: Nomura estimates
Ruchi Soya is the leading Indian edible oil player, with a significant presence in Price target Rs170.0
soybean crushing, palm refining and the consumer pack downstream market.
Upside/downside 20.5%
Capex and increasing utilisations will help volumes and the margin profile should Difference from consensus 61.5%
rise via increasing branded sales. Although the stock has done well (up 47% YTD),
outperformance should continue, underpinned by strong earnings growth (28% FY12F net profit (Rsmn) 3,005
CAGR) and value of palm plantations, in our view. We initiate with a BUY rating. Difference from consensus 16.2%
Source: Nomura
Catalysts
A 25-30% earnings CAGR led by volume and market-share growth should continue Nomura vs consensus
to drive re-rating. Long term, plantation can set an uplift to earnings. We think the street is not yet
Anchor themes factoring in upstream plantation
value, which can be a big driver,
Dependence on oil imports will remain a key theme. Industry consolidation and considering it already has 32,000ha
increasing branded sales will help larger players capture market share in the future. of palm oil under cultivation.
Feb10
May10
Jun10
Sep09
Oct09
Nov09
Jan10
Mar10
Apr10
Jul10
Aug10
for Ruchi Soya to remain strong (28% CAGR over FY10-13F). Plus,
leadership position and scale will help it capture any upside potential 1m 3m 6m
Absolute (Rs) 29.3 37.5 39.3
of the Indian edible oil market on both the volumes and margins front. Absolute (US$) 28.4 39.1 36.8
Relative to Index 27.6 27.0 31.4
Sizeable palm exposure will sustain momentum Market cap (US$mn) 765
Estimated free float (%) 53.1
Valuations, in our view, should also get supported via its foray in palm 52-week range (Rs) 141.1/77.4
plantations, which is yet to contribute to the earnings. Our implied 3-mth avg daily turnover (US$mn) 10.98
value of palm plantation is at a discount to related global peers, Stock borrowability
Major shareholders (%)
justified by lower yields and start-up risks, in our view. A positive Promoter Group 46.9
catalyst might be further investment in plantation assets outside India. Emerging Market Mgmt LLC 2.8
Source: Company, Nomura estimates
Exhibit 100. Ruchi Soya vs Indian markets Exhibit 101. Ruchi Soya vs commodity prices
(%) Ruchi Soya KS Oils (%) Ruchi Soya MPOB Palm Oil
60 Sensex BSE Midcap 450 Crude Soybean Oil
50 400
40 350
300
30
250
20 200
10 150
0 100
50
(10)
0
(20) (50)
(30) (100)
May-10
May-09
May-10
Mar-10
Mar-09
Nov-09
Mar-10
Feb-10
Jan-10
Apr-10
Jun-10
Jul-10
Aug-10
Sep-10
Jan-09
Jul-09
Sep-09
Jan-10
Jul-10
Sep-10
Source: Bloomberg Source: Bloomberg
We think the market has only just started to appreciate management’s 25-30% bottom- We don’t think the market is
line growth guidance over the next few years, driven by newer acquisitions and the placing enough stock in guidance
palm venture, which is yet to be reflected in the street’s numbers. We think strong
volumes along with sequential improvement in operating statistics and new initiatives
in oleochemicals and palm business will continue to lead stock performance from here.
In our view, it will re-rate in-line with other listed players in Singapore such as Wilmar,
which has a similar business profile.
Exhibit 102. Ruchi Soya: forward P/E Exhibit 103. Ruchi Soya: forward PEG
25 2.5
20 2.0
+1SD=13.9 +1SD=1.5
15 1.5
Average=1
10 Average=9.1 1.0
5 0.5 -1SD=0.6
-1SD=4.3
0 0.0
May-07
May-08
May-09
May-10
May-07
May-08
May-09
May-10
Jan-07
Sep-07
Jan-08
Sep-08
Jan-09
Sep-09
Jan-10
Jan-07
Sep-07
Jan-08
Sep-08
Jan-09
Sep-09
Jan-10
Source: Company data, Nomura estimates Source: Company data, Nomura estimates
Our calculation for the value of the plantations business represents an EV/ha of
US$7,812, which is at a significant discount to other listed mid-cap palm players in
Malaysia and Indonesia. We believe this is justified as none of the planted landbank of
Ruchi Soya is mature yet and Ruchi Soya does not own the land (unlike the others), as
its business model is similar to the Indonesian palm operations.
Exhibit 104. Global palm oil companies with comparable landbank, EV/ha
EV Planted EV/Total Planted Immature
Company (US$mn) hectarage Ha (US$) (%)
Genting Plantations 1,766 77,676 22,726 28.4
First Resources 1,388 99,844 13,909 30.5
Kencana Agri 429 29,542 14,533 44.2
Ruchi Soya ~250 32,000 7,812 0
Average 958 59,766 14,745
Source: Nomura research
Current crushing utilisations are however low, at around ~50% due to seasonality in
crushing operations and refining utilisations are some 80-90%, led by higher
utilisations at port-based refineries. We think that crushing utilisations will increase,
owing to consolidation in the industry and will lead to improving crushing spreads and
overall margin enhancement.
Exhibit 107. FY10 revenue breakdown Exhibit 108. FY10 EBIT breakdown
Others Others
Food Extractions Food 9% Extractions
7%
Products 14% Products 18%
2% 3%
Vanaspati
6%
Vanaspati
5%
Oils
71% Oils
65%
200,000
27
29
150,000 31
23 34
100,000 23
32 71 73
29 69
50,000 77 77 66
46 68
71
54
0
FY05 FY06 FY07 FY08 FY09 FY10 FY11F FY12F FY13F
30 60,000
25 50,000
20 40,000
15 30,000
10 20,000
5 10,000
0 0
FY05 FY06 FY07 FY08 FY09 FY10 FY11F FY12F FY13F
In addition, the company also acquired Sunshine Oleochemicals, for processing and
selling its fatty acid output and generate enhanced margins through the value add. We
think that these acquisitions are an attempt to secure volumes and address price risk
for various agri-commodities, in case of a supply shock.
We believe these acquisitions will drive the next leg of earnings growth for Ruchi Soya,
and the management will continue to target further acquisitions to grow their presence
in edible oil industry, especially palm, outside India.
Financial analysis
Financial analysis
Revenue growth — a capacity expansion and utilisation story
Increasing capacity utilisation and near-term capacity expansion will drive revenue and
net income growth for the company, in our view. Overall, we expect a volume CAGR of
14% and revenue CAGR of 19% over FY10-FY12F.
150,000 5
4
100,000 3
2
50,000
1
0 0
FY05
FY06
FY07
FY08
FY09
FY10
FY05
FY06
FY07
FY08
FY09
FY10
FY11F
FY12F
FY13F
FY11F
FY12F
FY13F
Source: Company data, Nomura estimates Source: Company data, Nomura estimates
FY06
FY07
FY08
FY09
FY10
FY05
FY06
FY07
FY08
FY09
FY10
FY11F
FY12F
FY13F
FY11F
FY12F
FY13F
Source: Company data, Nomura estimates Source: Company data, Nomura estimates
15 2,500
2,000
10 1,500
1,000
5
500
0 0
FY05
FY06
FY07
FY08
FY09
FY10
FY05
FY06
FY07
FY08
FY09
FY10
FY11F
FY12F
FY13F
FY11F
FY12F
FY13F
Source: Company data, Nomura estimates Source: Company data, Nomura estimates
FY06
FY07
FY08
FY09
FY10
FY05
FY06
FY07
FY08
FY09
FY10
FY11F
FY12F
FY13F
FY11F
FY12F
FY13F
Source: Company data, Nomura estimates Source: Company data, Nomura estimates
100 5
80
0
60
(5)
40
(10)
20
0 (15)
FY05
FY06
FY07
FY08
FY09
FY10
FY06
FY07
FY08
FY09
FY10
FY11F
FY12F
FY13F
FY11F
FY12F
FY13F
Source: Company data, Nomura estimates Source: Company data, Nomura estimates
Valuation risks
Delay in ramp up of capacity utilisation
We are building in capacity utilisation ramp-up to drive the volume and earnings
growth of the company. Any substantial delay in the capacity utilisation improving may
affect our processing volumes, and may have an adverse effect on earnings.
Appendix
Company background
Company background
Ruchi Soya is a manufacturer of edible oils, vanaspati, bakery fats and soya foods,
and is also the highest exporter of soya meal and lecithin from India. Nutrela (soya
chunks, granules, soya flour) is the largest selling soya foods brand in the country
today. It is the leader in the branded edible oil category as well with brands like Nutrela
Soyumm (Soyabean Oil), Ruchi Gold (Palmolein Oil), Sunrich (Sunflower Oil) and
Mandap (Mustard Oil). It has recently introduced new oil variants like Nutrela Vitamin
Sunflower oil and Nutrela Groundnut oil.
Management Profile
Mr Kailash Shahra, Chairman: He is Graduate in Commerce and Director of the
company since 1986 and is non-executive and promoter director of the Company. He
has 35-plus years experience in various fields of agri-commodity business, the soya
industry and is involved in strategic planning of Corporate affairs of the Ruchi Group.
Shareholding structure
Non Institutional
34%
Promoter
47%
Financial statements
Income statement (Rsmn)
Year-end 31 Mar FY09 FY10 FY11F FY12F FY13F
Revenue 127,798 143,944 171,477 195,382 203,459
Cost of goods sold (119,474) (134,596) (158,559) (180,135) (186,951)
Gross profit 8,324 9,348 12,918 15,247 16,509
SG&A (6,277) (5,909) (8,574) (9,769) (10,173)
Employee share expense
Operating profit 2,047 3,439 4,344 5,478 6,336
Growth (%)
Revenue 9.0 12.6 19.1 13.9 4.1
EBITDA (33.7) 52.9 23.5 25.0 11.6
EBIT (43.7) 68.0 26.3 26.1 15.7
Normalised EPS (43.3) 64.3 (4.2) 29.8 24.0
Normalised FDEPS (40.7) 44.3 (5.2) 29.8 24.0
Per share
Reported EPS (Rs) 5.1 8.5 8.0 10.3 12.8
Norm EPS (Rs) 5.1 8.3 8.0 10.3 12.8
Fully diluted norm EPS (Rs) 5.1 7.3 6.9 9.0 11.1
Book value per share (Rs) 63.9 64.7 56.9 66.5 78.4
DPS (Rs) 0.6 0.8 0.8 1.0 1.3
Source: Nomura estimates
Cashflow (Rsmn)
Year-end 31 Mar FY09 FY10 FY11F FY12F FY13F
EBITDA 2,905 4,443 5,486 6,856 7,650
Change in working capital 4,134 (1,026) (1,198) (1,424) (2,076)
Other operating cashflow (360) (1,033) (1,271) (1,510) (1,873)
Cashflow from operations 6,679 2,384 3,016 3,923 3,702 Interest income
Capital expenditure (3,060) (2,879) (4,287) (534) (578)
Free cashflow 3,619 (495) (1,271) 3,389 3,124
Reduction in investments 1 - - - -
Net acquisitions
Reduction in other LT assets (553) (79) (87) (95) (105)
Addition in other LT liabilities 330 - - - -
Adjustments 1,614 1,332 1,060 819 1,010
Cashflow after investing acts 5,011 759 (297) 4,113 4,030
Cash dividends (149) (231) (296) (379) (465)
Equity issue 1 10 607 - -
Debt issue (1,384) (800) (500) (500) (500)
Convertible debt issue
Others (1,687) (1,838) (1,627) (1,558) (1,487)
Cashflow from financial acts (3,219) (2,859) (1,816) (2,436) (2,452)
Net cashflow 1,793 (2,100) (2,113) 1,677 1,578
Beginning cash 9,595 11,387 9,287 7,174 8,851
Ending cash 11,387 9,287 7,174 8,851 10,428
Ending net debt 7,128 8,428 10,041 7,864 5,787
Source: Nomura estimates
Liquidity (x)
Current ratio 1.53 1.44 1.35 1.37 1.43
Interest cover 4.3 5.2 6.1 6.1 9.6
Leverage
Net debt/EBITDA (x) 2.45 1.90 1.83 1.15 0.76
Net debt/equity (%) 59.1 61.2 60.7 40.7 25.4
Activity (days)
Days receivable 35.1 34.5 33.6 34.4 35.9
Days inventory 57.2 44.0 43.1 43.9 45.8
Days payable 94.4 90.0 88.1 89.9 93.6
Cash cycle (2.1) (11.5) (11.4) (11.5) (12.0)
Source: Nomura estimates
Wilmar, although not growing fast in FY10F, remains a strong fundamental Price target S$8.24
(set on 2 Mar 10)
franchise, in our view, and a proxy play on the region’s key consumption
Upside/downside 29.5%
economies. Given its upstream and midstream exposure, any surge in food Difference from consensus 7.5%
demand that causes a spike in food inflation will likely benefit the company. New
businesses, such as rice, flour, sugar and edible oils in India, should lead the next FY10F net profit (US$mn) 1,866
leg of earnings growth, which should support valuations. BUY reaffirmed. Difference from consensus 4.3%
Source: Nomura
Catalysts
A surge in contributions from the rice/flour business and firm commodity prices/ Nomura vs consensus
volumes may prompt a positive surprise, sustaining a rolling re-rating.
We are building in contributions from
Anchor themes Wilmar’s rice and flour business in
China will likely continue to drive Wilmar’s growth, with it holding a significant share China for the next two years; here
of China’s oilseed and edible oil areas and, later on, the rice and flour industry. we think we run ahead of consensus.
India, though a long-term story, should become an important market for Wilmar.
Mar10
May10
Jun10
Jul10
Feb10
Apr10
Aug10
Downside risks. Shortages of raw materials (eg, palm oil, oilseed) could hurt trading
volumes of Wilmar’s merchandising and processing businesses. Reduced bargaining
power attributable to falling demand could hurt profitability. Underlying growth in
volumes and profitability could be constrained by the regulatory framework. Major
fluctuations in raw material and product prices also represent a risk to profitability.
Financial statements
Income statement (US$mn)
Year-end 31 Dec FY07 FY08 FY09 FY10F FY11F
Revenue 16,466 29,145 23,885 29,585 35,053
Cost of goods sold (14,738) (25,585) (20,882) (25,122) (29,881)
Gross profit 1,728 3,560 3,003 4,463 5,172
SG&A (794) (1,628) (711) (1,767) (2,072)
Employee share expense
Operating profit 933 1,932 2,292 2,696 3,100
Growth (%)
Revenue 210.6 77.0 (18.0) 23.9 18.5
EBITDA 526.0 100.6 18.9 18.5 14.7
EBIT 589.3 107.0 18.6 17.6 15.0
Normalised EPS 531.2 54.4 30.3 8.9 17.7
Normalised FDEPS 531.2 52.4 28.6 8.9 17.7
Per share
Reported EPS (US$) 0.13 0.24 0.29 0.29 0.34
Norm EPS (US$) 0.13 0.21 0.27 0.29 0.34
Fully diluted norm EPS (US$) 0.13 0.20 0.26 0.28 0.33
Book value per share (US$) 1.23 1.50 1.71 1.95 2.22
DPS (US$) 0.02 0.05 0.05 0.06 0.07
Source: Nomura estimates
Cashflow (US$mn)
Year-end 31 Dec FY07 FY08 FY09 FY10F FY11F
EBITDA 1,067 2,140 2,544 3,013 3,455
Change in working capital (3,558) 1,030 (2,586) (755) (2,292)
Other operating cashflow 1,466 62 (478) (398) (468)
Cashflow from operations (1,025) 3,231 (520) 1,860 695
Capital expenditure (544) (1,012) (932) (1,220) (958)
Free cashflow (1,570) 2,219 (1,452) 640 (263)
Reduction in investments (438) (744) 18 - -
Net acquisitions
Reduction in other LT assets (467) 349 (135) - -
Addition in other LT liabilities 255 26 98 - -
Adjustments 664 84 (332) (0) -
Cashflow after investing acts (1,556) 1,935 (1,803) 640 (263)
Cash dividends (22) (240) (328) (373) (439)
Equity issue - - 8 - -
Debt issue 2,103 (995) 4,296 500 -
Convertible debt issue
Others 398 1,226 68 (343) (345)
Cashflow from financial acts 2,479 (9) 4,045 (216) (785)
Net cashflow 924 1,926 2,242 424 (1,048)
Beginning cash 44 968 2,893 5,135 5,559
Ending cash 968 2,893 5,135 5,559 4,511
Ending net debt 4,060 2,390 4,445 4,521 5,569
Source: Nomura estimates
Liquidity (x)
Current ratio 1.15 1.40 1.24 1.26 1.36
Interest cover 5.7 7.6 52.8 6.7 7.8
Leverage
Net debt/EBITDA (x) 3.81 1.12 1.75 1.50 1.61
Net debt/equity (%) 51.8 24.9 40.7 36.4 39.3
Activity (days)
Days receivable 22.8 22.5 40.1 44.8 47.9
Days inventory 49.3 43.5 56.0 66.4 71.0
Days payable 16.4 20.3 32.0 36.8 39.3
Cash cycle 55.8 45.6 64.1 74.4 79.5
Source: Nomura estimates
Tushar Mohata (Associate) — all enquiries arising from this note should be directed to Tanuj Shori.
ANALYST CERTIFICATIONS
We, Tanuj Shori, Aatash Shah and Tushar Mohata, hereby certify (1) that the views expressed in this Research report accurately reflect our
personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of our compensation was, is or
will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of our
compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International
plc or any other Nomura Group company.
Previous Ratings
Issuer Previous rating Date of change
KS Oils Not Rated
Ruchi Soya Industries Ltd Not Rated
Wilmar International Strong Buy 29 Oct 2008
The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a
portion of which is generated by Investment Banking activities.
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