Agriculture Nomura Sept10[1]

8/8/2019 Agriculture Nomura Sept10[1]

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14 September 2010Nomura

N O M U R A S I N G A P O R E L I M I T E D

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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.

Agri-related | I N D I A CONSUMER RELATED

Tanuj Shori +65 6433 6981 tanuj.shori@no mura.com Aatash Shah +91 22 4037 4194 aatash.shah@nom ura.com Tushar Mohata ( Associate)

Time to sizzleWe are Bullish on the Indian edible oil sector. Domestic demand is set for a 7% CAGRto 30mn MT by 2020F, against production growth of just 2.7% pa. Acreageopportunities are limited and most demand growth will come from imported palm oil(~20% CAGR). The industry is highly fragmented, with the top 4-5 players taking 57%of the market. As reliance on imports mounts and integration benefits across the valuechain come to the fore, we expect increasing industry consolidation. Big players shouldbe best placed to expand market share and margins. On our forecasts, higher-marginbranded sales will account for 60% of the market by 2015, from 25% now. We initiateon Ruchi Soya, Indias largest edible oil player, with a BUY. Targeting 25-30% pabottom-line growth and exposed to palm plantation, Ruchi should increasingly bebenchmarked to global peers, in our view. Even allowing for KS Oils tax raid overhang

and slower growth, its recent correction looks overdone. On the back of its leadershipof the mustard (rapeseed) market, we forecast a diluted 16% FY10-13F earningsCAGR and initiate with BUY. Wilmar, a proxy to the Indian edible oil story through itsJV with Adani group, remains a BUY.

Initiate BUYs on Ruchi Soya, KS Oils; reaffirm BUY on Wilmar

We expect industry growth of 7% and branded sales growth of 25%

Incremental demand will be imported and has to be met by palm

Consolidation is the theme, with few players dominating the market

NEWTHEME

Stocks for action

We initiate with BUY ratings on RuchiSoya and KS Oils and maintain our BUY call on Wilmar.

Stock RatingPrice

(local)Price

target

Ruchi Soya (RSI IN) BUY * INR141.1 INR170KS Oils (KSO IN) BUY * INR51.1 INR67Wilmar (WIL SP) BUY S$6.36 S$8.24

* Initiating coverage

Price as on 9 September, 2010

AnalystsTanuj Shori+65 6433 [email protected]

Aatash Shah+91 22 4037 [email protected]

Tushar Mohata (Associate)


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14 September 2010Nomura 1

Agri-related | I N D I A CONSUMER RELATED

Tanuj Shori +65 6433 6981 tanuj.shori@no mura.com Aatash Shah +91 22 4037 4194 aatash.shah@nom ura.com Tushar Mohata ( Associate)

ActionWe initiate coverage on the Indian edible oil sector with a Bullish view and a BUY

rating on Ruchi Soya and KS Oils. We also reaffirm our BUY on Wilmar as a proxyto the sector through its JV with Adani. We believe the sector is set for a demandinflection, change in mix from an unbranded to a branded market and consolidationamong industry participants, which should fuel re-rating for leading players. Importpolicies and an increase in domestic yields can be a swing factor, in our view.

CatalystsKey catalysts would be a volume uptick and margin inflection led by growing capex,higher utilisations and change in sales mix to branded edible oil market.

Anchor themes

Key themes dominating the Indian oilseed complex are dependence on oil imports,

and a fragmented industry structure. We think industry consolidation andhigher-margin branded sales will help larger players capture market share.

Time to sizzle

Initiate BUYs on Ruchi Soya, KS Oils; reaffirm BUY on Wilmar We think Ruchi Soyas targeted growth, with its exposure to palm plantation anddominant position in soybean processing and edible oil refining in India justify a re-rating. KS Oils is the market leader in mustard and capacity utilisation should help itcapture further market share, and thus we believe the correction due to corporategovernance concerns (post the recent tax raids) is overdone and the stock islooking attractive, trading at just 9.1x FY12F P/E. Wilmar, we believe, is a goodproxy to the Indian edible oil market with a leading presence through its JV. Weinitiate coverage on the sector with a BUY on Ruchi Soya and KS Oils and reaffirmour BUY on Wilmar.

We expect industry growth of 7% and branded sales growth of 25%Indian edible oil demand is set to rise from 16mn MT now to 30mn MT by 2020F,more than Chinas market size today, implying a CAGR of 7%. More importantly,with increasing quality consciousness, rising incomes and consolidation, industryexperts suggest branded sales are likely to grow at ~25-30% over the next fewyears. Branded sales comprise only about 25% of the total edible oil market in India

now, but may grow to ~60% of the market by 2015F, as per our estimates.

Incremental demand will be imported and has to be met by palmDomestic consumption is expected to outstrip production growth (~2.7%), implyingimports must grow at a much faster rate (~15%) to fill the demand. As acreageopportunities are limited in other crops, most of this demand growth will come frompalm oil (~20% CAGR). Thus the players with refining / upstream exposure to palmstand to gain market share and volumes, in our view.

Consolidation is the theme, with few players dominating the marketDue to the recent financial crisis, several poor harvests and reduction in importduties on edible oil, a lot of small scale solvent extractors and refiners have closeddown, or been taken over by larger players in the industry. We expect this to be anongoing trend; as larger players have several key advantages, such as being ableto sustain a price war, access to cheaper credit from MNC banks and markets,lower marginal cost of production, and possibility of backward integration.

N O M U R A S I N G A P O R E L I M I T E D

Stocks for action

We initiate with BUY ratings on

Ruchi Soya and KS Oils andmaintain our BUY call on Wilmar.

Stock RatingPrice

(local)Price

target

Ruchi Soya (RSI IN) BUY * INR141.1 INR170KS Oils (KSO IN) BUY * INR51.1 INR67Wilmar (WIL SP) BUY S$6.36 S$8.24

* Initiating coverage

Price as on 9 September, 2010

NEWTHEME

AnalystsTanuj Shori+65 6433 [email protected]

Aatash Shah+91 22 4037 [email protected]

Tushar Mohata ( Associate)


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Agri-related | India Tanuj Shori


Contents

Indian edible oil stage set for inflection 5 Initiate coverage with a BUY on Ruchi Soya and KS Oils, upside of 21% and 31%,respectively, and reaffirm BUY on Wilmar 5 Potential demand implies industry growth of 7% and branded sales growth of 25-

30% 6 Way forward for Indian edible oil industry incremental demand to be met bypalm and soybean oil imports 7 Consolidation the theme as a few rise to the top 8 One who moves fast will make money fast; Ruchi Soya, KS Oils and AdaniWilmar likely to be key beneficiaries 8 Valuations lack of benchmark and regional perspective 9 Risks mostly on execution and government policies 10

A potential market as big as China 12

Indian edible oil demand has grown with population and income; still significantlybelow world average 12 Indian edible oil market can top where China is now in the next 10 years 12 China and India differ in what they import and consume 13 Indian oil production unlikely to match demand this year 13 India is going to meet most of edible oil deficit through palm oil 14

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

Indian edible oil industry is fragmented and capacity utilisation is low 17 Ruchi Soya and KS Oils are largest listed processors by capacity 18 Recent consolidation to continue, the top players will capture the growth, in our view 18

India still an untapped branded oil market 19 Palm is still largely an unbranded story; sunflower oil has the highest proportionof packaged sales 20

Ruchi Soya and Adani-Wilmar lead branded market share 20


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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 hasremained stagnant 23 resulting in lower import tariffs and higher imports 23 Indian oilseed production has only increased marginally; however, share of globalproduction has remained stable 24 Area under soybean cultivation has increased; yields still low 24 Until India becomes self-sufficient in oilseed output, incremental imports aregoing to fulfil edible oil demand 25 Imports of oilseeds in India is almost non-existent due to policy restrictions andlack of a viable meal market 25 however, the government may have to revisit restrictions if it wants to reduceedible oil import dependence 26 ... which will be a positive for local processors in our view 26

Palm, soybean and mustard oil are the three pillars 27 The oils differ in fat composition and taste 28 Consumption is regional and consumer preference driven 28 implying Ruchi Soya and KS Oils serve non-overlapping consumer belts 29

Palm oil: the next big opportunity 30 Palm oil imports steadily rising; soybean oil imports remained constant 30 However palm oil demand is price driven; may fall if it trades at parity to other oils 31 Palm refining margins are better than soybean or sunflower oil 32

Everyone wants a share of the palm oil market 33

Mustard oil limited volume growth but margin accretion throughbranded sales 34

Mustard is easy to grow with a high oil yield 34 Mustard seed and oil prices to remain fairly constant 34

Soybean oil: losing market share 36 A low oil yield with a better quality meal 36 Soybean oil losing market share to palm 36 Crushing margins do not move in line with global margins 36

Appendix 1: Refining process flow 37

Appendix 2 Pictures from Agri-Diaries 38

Latest company viewsK.S. Oils 40

Ruchi Soya Industries 54

Wilmar International 68


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Indian edible oil industry

Exhibit 1. Indian edible oil industry

World edible oil consumptionChina,

27.2mn mT

India,15.6mn mT

EU-27,23.7mn mT

Others,71.1mn mT

Palm, 43% Soybean, 17% Rapeseed, 14%

Peanut, 9%

Cottonseed, 7%

Sunflowerseed, 5%

Other, 4%

Branded sales, Rs 188bn

Unbranded sales, Rs563 bn

0% 20% 40% 60% 80% 100%

Keyplayers

Major OilPresence Crushing Refining

BrandedOils

Ruchi Soya Soybean, palm 13.7% 13.4% 17.3%Adani Wilmar Soybean, palm 6.1% 6.3% 16.5%

KS Oils Mustard 5.2% 3.3% 5.0%

Potential market share of Indiastotal

Note: Market share data for crushing and refining assumes 100% utilisation. Branded market share is as per Ruchi Soya presentation

Source: Nomura research, Company data


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Executive summary

Indian edible oil stage set for inflection

Initiate coverage with a BUY on Ruchi Soya and KS Oils, upsideof 21% and 31%, respectively, and reaffirm BUY on Wilmar

Ruchi Soya attractive despite the run-upWe initiate coverage on the Indian edible oil sector with a Bullish view and on RuchiSoya with a BUY rating and potential upside of 21%. We think Ruchi Soyas targetedbottom-line growth of 25-30% pa, along with its exposure to palm plantation, anddominant position in oilseed processing and edible oil refining in India justify are-rating as it is the largest edible oil player in India. We believe the market will startappreciating the companys similarity to its global peers as earnings delivery continueswith expanding scale of operations and margin enhancement. We think Ruchi Soyalooks attractive even after the recent run (up 28% over the past one month), as strong1Q11 results suggest the company is on track for another strong year FY11F.

KS Oils value among debrisKS Oils, on the other hand has lagged in performance vs Ruchi Soya and thebenchmark index (down 21% YTD), mostly due to corporate governance concernspost the recent tax raids on the company. We think the correction is overdone and thestock is looking attractive, currently trading at -1SD of just 9.1x FY12F P/E. Althoughthe tax issue may remain a near-term overhang and a key risk, earnings growth on theback of increasing presence and leadership in the mustard (rapeseed) market justifiesa bounce back, in our view. We apply a 20% discount to arrive at our target 12xmultiple for KS Oils to account for risks and relative slower growth as compared toRuchi Soya, and initiate with a BUY with potential upside of 31% and a PT of INR67/share.

Wilmar proxy to Indian edible oil demandWe believe Wilmar is a very good proxy to play the Indian edible oil story as it is one of the leading players through its JV with Adani group. As per our estimates, Wilmar isthe second largest oilseed processor, second largest oil refiner and controls ~17% of branded consumer pack edible oil market in India. To add, Wilmar is heavily investinginto growing its Indian edible oil business and sees it as a very attractive market. Our channel checks suggest that Wilmar is one of the better organised player in theindustry with the best corporate governance structure. We thus reiterate our BUY onWilmar with potential upside of 30%.

Exhibit 2. Indian edible oils vs Index performance

(30)

(20)

(10)

0

10

20

30

40

50

60

J a n - 1

0

F e b - 1

0

M a r - 1 0

A p r - 1 0

M a y - 1

0

J u n - 1

0

J u l - 1 0

A u g - 1

0

S e p - 1

0

Ruchi Soya KS Oils

Sensex BSE Midcap

(%)

Source: Company data, Nomura estimates

Exhibit 3. Edible oil companies relative performance

(30)(20)(10)

0102030405060

J a n - 1

0

F e b - 1

0

M a r - 1

0

A p r - 1

0

M a y - 1

0

J u n - 1

0

J u l - 1

0

A u g - 1

0

S e p - 1

0

Ruchi Soya KS Oils Wilmar (%)


Bullish and BUY


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Exhibit 4. Ruchi Soya: forward P/E

0

5

10

15

20

25

J a n - 0

7

M a y - 0

7

S e p - 0

7

J a n - 0

8

M a y - 0

8

S e p - 0

8

J a n - 0

9

M a y - 0

9

S e p - 0

9

J a n - 1

0

M a y - 1

0

+1SD=13.9

Average=9.1

-1SD=4.3


Exhibit 5. KS Oils: forward P/E

5

7

9

11

13

15

17

19

21

J u l - 0 7

N o v - 0

7

M a r - 0 8

J u l - 0 8

N o v - 0

8

M a r - 0 9

J u l - 0 9

N o v - 0

9

M a r - 1 0

J u l - 1 0

+1SD=13.9

Average=11.4

-1SD=8.9


Exhibit 6. Ruchi Soya: forward PEG

(0.2)

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

J a n - 0

7

M a y - 0 7

S e p - 0

7

J a n - 0

8

M a y - 0 8

S e p - 0

8

J a n - 0

9

M a y - 0 9

S e p - 0

9

J a n - 1

0

M a y - 1 0

+1SD=0.9

Average=0.4

-1SD=0


Exhibit 7. KS Oils: forward PEG

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

J u l - 0 7

N o v - 0

7

M a r - 0 8

J u l - 0 8

N o v - 0

8

M a r - 0 9

J u l - 0 9

N o v - 0

9

M a r - 1 0

J u l - 1 0

+1SD=0.9

Average=0.7

-1SD=0.5


Potential demand implies industry growth of 7% and brandedsales growth of 25-30%Per capita consumption of vegetable oils in India has increased 30% from ~10kg/year in 2001 to ~13kg/year in 2010, underpinned by 132% growth in per capita income toUS$1000 over the period. Overall demand for edible oils has risen 40% as a result toabout 15.6mn mT, second only to China at 27mn mT. However, Indian per capitaconsumption still lags significantly below the world average of 22kg/year, and even

developing neighbours such as China and Pakistan at 20kg/year

Indian edible oil demand is set to rise from 16mn MT now to 30mn MT by 2020, morethan Chinas market size of today, implying a CAGR of 7%. More importantly, withincreasing quality consciousness, rising incomes and consolidation, industry expertssuggest branded sales are likely to grow at ~25-30% over the next few years. Brandedsales of edible oil in India at ~US$4bn comprise only about 25% of the total edible oilmarket 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 willrepresent ~55-60% of the total market by 2015F.

Plenty of room for growth, evento pull even with regional peers

Transition from unbranded tobranded market


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Exhibit 8. Per capita oil consumption in the world (kg/year)

10

15

20

25

30

35

U n i t e d

S t a t e s

I n d o n e s i a

C h i n a

A r g e n t i n a

P a k i s t a n

B r a z i l

R u s s i a

J a p a n

M e x i c o

I n d i a

(kg/yr)

Source: Nomura research, USAD FAS

Exhibit 9. Branded edible oil market is forecast to grow at 25-30% pa

188

632

563

420

0

200

400

600

800

1,000

1,200

2010 2015F

Branded sales Unbranded sales(Rs bn)

Branded CAGR =25-30%

Overall growth = 7%

Source: Company data, Nomura research

Way forward for Indian edible oil industry incrementaldemand to be met by palm and soybean oil importsWe believe India will continue to have an oil deficit as total demand in India doubles toabout 30mn mT by 2020, as per our estimates. However, driven by lower yields,agricultural production will continue to lag this demand growth. Domestic consumptionis expected to grow at 8.6% annually over 2007-11F, outstripping production growth atonly 2.7%, implying imports must grow at a much faster rate (~15%) to fill the demand.

As demand increases for edible oils, although at some stage, the government mighthave to rethink its seed policy to allow higher yields from imported GMO seeds to fulfilthis demand, but in the near-medium term, India will rely more on palm and soybeanoil imports to fulfil this demand.

As acreage opportunities are limited in other crops, most of this demand growth willhave to be satisfied by palm oil (expected to grow at ~20% CAGR). Thus the playerswith refining / upstream exposure to palm will stand to gain market share and volumesin our view.

Domestic supply cant keep upwith demand


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Exhibit 10. Monthly crude palm oil imports

India total CPO imports

0

100

200

300

400

500

600

J a n - 0

4

J u l - 0 4

J a n - 0

5

J u l - 0 5

J a n - 0

6

J u l - 0 6

J a n - 0

7

J u l - 0 7

J a n - 0

8

J u l - 0 8

J a n - 0

9

J u l - 0 9

J a n - 1

0

J u l - 1 0

('000 mT)

Source: Solvent Extractors Association of India

Exhibit 11. Monthly crude soybean oil imports

India total Crude Soy oil imports

0

50

100

150200

250

300

350

J a n - 0

4

J u l - 0 4

J a n - 0

5

J u l - 0 5

J a n - 0

6

J u l - 0 6

J a n - 0

7

J u l - 0 7

J a n - 0

8

J u l - 0 8

J a n - 0

9

J u l - 0 9

J a n - 1

0

J u l - 1 0

('000 mT)


Consolidation the theme as a few rise to the topDue to the recent financial crisis, several poor harvests and reduction in import dutieson edible oil, quite a few small-scale solvent extractors and refiners have closed down,or been taken over by larger players in the industry. The number of solvent extractorshas fallen from 766 to 711 and refiners have come down from 800 to ~600 since 2005.We expect this to be an ongoing trend; as larger players have several key advantagessuch as being able to sustain a price war, access to cheaper credit from MNC banksand markets, lower marginal cost of production, and possibility of backward integration.The larger players are more likely to achieve positive crushing margins, even if theprice of oils and meals corrects severely, but the price of raw oilseeds are not allowedto go below their Minimum Support Price, in our view, owing to their scale and globalsupply chain networks.

One who moves fast will make money fast; Ruchi Soya, KS Oilsand Adani Wilmar likely to be key beneficiariesThe 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 likelyindustry dynamics in two ways: 1) from increasing capacity utilisations and2) consolidation in the industry, and will likely capture all the incremental industrygrowth, in our view.

Operators such as KS Oils, Ruchi Soya, Adani-Wilmar should be able to grab marketshare from the unorganised sector, which is unlikely to be able to compete with them

in terms of sourcing capability, quality factors and the like. This will lead toconsolidation in the industry, and we think a major share of the approximatelyUS$35bn Indian edible oil market may be held by four-five players in a few years fromnow. Thus, whoever is present in the space with the operational set-up to satisfy thisdemand will be the winner, in the long run, in our view.

Exhibit 12. Indian edible oil market share

Potential market share of Indias total (%)Capacity Crushing Refining BrandedRuchi Soya 13.7 13.4 17.3Adani Wilmar 6.1 6.3 16.5

KS Oils 5.2 3.3 5.2Note: Potential market share assumes 100% utilisation

Source: Nomura research, Ruchi Soya presentation

The branded players should beable to muscle out the

unorganised sector


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Exhibit 14. Estimate summary

Revenue growth (%) EPS growth (x) ROE (%) Net margin (%)Net debt/Equity

(%)

Name Nomura rating

Marketcap

(US$mn)Closing

price 09 10F 11F 09 10F 11F

EPSCAGR &(09-11F) 10F 11F 10F 11F 10F 11F

Upstream

Palm OilSime Darby (SIME MK) REDUCE 15,842 8.2 (8.9) 4.6 9.4 (35.1) (25.6) 83.0 16.6 7.8 13.5 5.2 8.7 17.1 19.6

IOI (IOI MK) REDUCE 11,805 5.5 (0.4) (14.1) 7.9 (36.5) 9.5 19.1 14.2 21.3 17.3 16.2 14.4 8.1 5.7

KLKepong (KLK MK) REDUCE 5,869 17.1 (15.2) (0.8) 7.6 (41.1) 54.1 11.3 31.0 16.2 16.7 14.3 14.8 7.4 7.0Golden Agri (GGR SP) NEUTRAL 5,297 0.585 (23.2) 2.9 8.3 (43.5) 72.6 15.7 41.3 0.5 0.5 14.8 15.8 7.3 7.1Indofood Agri (IFAR SP) NEUTRAL 2,538 2.35 (23.6) 30.6 11.1 (1.3) 9.8 11.3 10.5 9.8 11.3 11.4 11.4 43.3 33.1

Astra Agro (AALI IJ) NEUTRAL 3,613 20,700 (9.0) (1.0) 11.6 (36.9) (1.4) 33.5 14.7 24.8 29.5 22.3 26.6 net cash net cashUpstream average (13.4) 3.7 9.3 (32.4) 19.8 29.0 21.4 13.4 14.8 14.0 15.3 16.6 14.5

Midstream

Wilmar (WIL SP) BUY 30,329 6.36 (18.0) 23.9 18.5 28.6 8.9 17.7 13.2 16.0 16.5 6.3 6.3 36.4 39.3

Olam (OLAM SP) BUY 4,405 2.79 6.2 22.6 14.0 9.6 16.0 19.8 17.9 25.5 17.7 3.4 2.8 216.2 224.0Noble (NOBL SP) BUY 7,619 1.7 (13.6) 49.0 14.0 (21.3) (7.7) 32.0 10.3 14.6 17.0 1.0 1.1 101.1 95.0

China Agri (606 HK) BUY 5,208 10.02 4.8 16.4 29.3 (28.8) 32.7 36.2 34.5 15.3 17.5 5.1 5.4 40.4 51.0ADM (ADM US) NR 20,426 31.95 7.1 (7.7) 3.6 8.9 (10.2) 2.6 (4.0) 12.9 11.9 2.9 2.9 27.5 27.4

Bunge (BG US) NR 7,846 55.93 (20.2) 6.4 7.0 (57.0) 5.7 58.8 29.5 4.5 7.2 1.1 1.7 12.8 4.6KS Oils Ltd (KSO IN) BUY 436 51.05 54.9 29.3 18.3 (2.3) 4.6 14.0 9.2 22.4 16.2 5.7 4.4 83.7 72.2Ruchi Soya Industries Ltd(RSI IN)

BUY 765 141.05 9.0 12.6 19.1 13.7 4.1 20.7 12.1 14.0 15.3 1.3 1.3 61.2 60.7

Midstream average 3.8 19.1 15.5 (6.1) 6.8 25.2 15.3 15.7 14.9 3.3 3.2 72.4 71.8

Downstream

- China

China Foods (506 HK) REDUCE 2,049 5.7 18.1 19.7 22.3 16.7 4.8 18.2 11.3 10.9 11.9 3.1 3.0 net cash net cashWant Want (151 HK) NEUTRAL 10,492 6.17 10.1 29.5 29.0 20.0 20.8 24.1 22.5 37.4 38.7 17.6 16.5 net cash net cash

Tingyi Holding (322 HK) NEUTRAL 14,051 19.54 18.9 28.5 28.0 51.1 (1.4) 28.6 12.6 26.6 27.8 6.4 6.0 net cash net cashChina Mengniu (2319 HK) NEUTRAL 5,299 23.7 7.7 18.5 17.3 (206.3) 10.3 18.7 14.4 14.3 15.2 4.3 4.3 net cash net cashDownstream average 13.7 24.0 24.2 (29.6) 8.6 22.4 15.2 22.3 23.4 7.9 7.5 net cash net cash

Overall average 0.3 15.0 15.4 (20.1) 11.5 25.8 17.3 16.4 16.8 7.9 8.2 51.0 49.8

Note: Pricing as on 9-Sep, RSI IN and KSO INs values are for calendar year


Exhibit 15. Ruchi Soya and KS Oils: valuation details

Max Min Current Average

Ruchi SoyaP/E 22.9 2.0 12.6 9.1P/B 2.2 0.2 1.8 1.0PEG 2.4 0.1 0.5 0.4P/S 0.21 0.02 0.18 0.10KS OilsP/E 19.3 7.3 8.5 11.4P/B 3.5 1.2 1.2 1.9PEG 1.3 0.4 0.4 0.7P/S 1.0 0.3 0.4 0.5

Note: Above values are on a N12M basis and so may not tally with Exhibit 12 and 13

Source: Nomura estimates

Risks mostly on execution and government policies

Policy on oilseed importsCurrently, oilseed imports in India are restricted and unfeasible owing to regulationsand the lack of a meal market in India. We think any policy change by the governmentto allow oilseed imports, although unlikely over the medium term, may be negative for the companies under coverage, as they have been building incremental refiningcapacities, and not invested heavily in soybean crushing capacity generation.

Import tariff structure for edible oils

Any increase to the import tariffs for edible oils to historical high levels, though unlikelyto happen due to increasing dependence on edible oil imports, may depress refiningmargins for the companies.


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Execution risk, in terms of capacity utilisations and margin growthThe companies have built up significant capacities and are expecting volume andmarket share growth through increasing capacity utilisation and branded sales growth.Any delay in ramp-up of utilisation may lead to muted earnings growth than expected.

Corporate governance and investments in non-core business

Both companies have invested significant capex in developing wind power operations.Although management at both companies state these investments are for captivepower generation, and they dont intend to be in the power business, there might beconcerns on these non-core assets. In addition, the search conducted by the incometax department on KS Oils premises in March may be an overhang on the companysshare price for some months.

Investment in wind power isabout providing power notdiversfying revenue


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How big is the India opportunity?

A potential market as big as ChinaWe believe the Indian market presents a significant growth opportunity for edible oilplayers owing to a growing population, income growth, low current per capitaconsumption, low penetration and the fact that edible oils are a necessary part of thedaily diet for a majority of Indian consumers. As per our estimates, Indian edible oilmarkets may reach 30mn mT by 2020F, which is more than the size of todays Chinamarket.

Indian edible oil demand has grown with population and income;still significantly below world averagePer capita consumption of vegetable oils in India has increased by 30% from~10kg/year in 2001 to ~13kg/year in 2010, underpinned by a 132% growth in per capita income to US$1,000 over the period. Overall demand for edible oils has risen by40% 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 at20kg/year.

Exhibit 16. Consumption vs population growth

9.5

10.511.5

12.5

13.5

14.5

15.5

16.5

17.5

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0 F

2 0 1 1 F

950

1,000

1,050

1,100

1,150

1,200

1,250Population (RHS)Total oil consumption (mn mT) (LHS)

(mn mT) (mn)

Note: Does not include fats like butter etc

Source: USDA FAS, IMF

Exhibit 17. Per capita consumption v income growth

9.5

10.0

10.511.0

11.5

12.0

12.5

13.0

13.5

14.0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0 F

2 0 1 1 F

0

200400

600

800

1,000

1,200GDP/capita (RHS)

Per capita consumption (LHS)

(kg/year) (US$)

Note: Does not include fats like butter etc

Source: USDA FAS, IMF

Indian edible oil market can top where China is now in the next10 years

As shown below, Indian per capita consumption is still significantly below levels inother developing countries, mainly because of lower household incomes, and a smallurban population in proportion to the overall population, in our view. As per industryestimates, the proportion of Indian middle-class, (which has adequate purchasingpower for consumer staples like edible oils), is expected to rise from 5% of populationin 2007 to 40% by 2025. We think this would lead to Indias per capita oil consumptionreaching 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, Indias totaledible oil market size can be ~30mn mT, by 2020F which, is more than China today.

As in so many other comparisons, India stacks up toChina here

India has seen per capita incomerise by 132% since 2001; and thisextra money is going to fuelconsumption


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Exhibit 18. Indian edible oil market: big potential

RussiaPakistan

Mexico

Indonesia

India

China

BrazilArgentina

10

12

14

16

18

20

22

24

26

0 2,000 4,000 6,000 8,000 10,000 12,000GDP/capita (US$)

Per capita consumption (kg/yr)

Note: Area of the bubble represents total market size

Source: USDA FAS, IMF, Nomura research

We estimate Indian per capita consumption will equal the current world average in thenext 10 years, and the total consumption of edible oil is expected to double from 16mnmT currently to 30mn mT by 2020F, which implies a CAGR of 7%.

China and India differ in what they import and consumeLike India, Chinese domestic oilseed production is not sufficient to match its edible oildemand, and it relies on imports to make up for the deficit. However, China importsraw oilseeds and crushes them locally to produce edible oil, whereas India importscrude edible oil and refines it locally. Soybean oil is the oil of choice in China, whereaspalm is the most consumed oil in India. In addition, almost all oil meal produced inChina is consumed locally, whereas ~25% of Indian meals are exported, owing to

other animal feed options available in India.

Exhibit 19. China vs India: a comparison

2010/11F estimates China IndiaOilseedsMajor oilseed production Peanut and Soybean Cottonseed% of total oilseed production 26% 31%

Major oilseed imported Soybean None% of total oilseed consumed 59% -

Oilseed imports as % of total crushed 60% Very small Vegetable oilsMajor vegetable oil consumed Soybean oil and palm Palm oil and Soybean oil% of total oil consumed 40% & 24% 46% & 16%

Major vegetable oil imported Palm oil Palm oil% of total oil consumed 24% 46%Oil imports as % of total oil consumed 37% 57%Protein mealsProtein meal consumed as % of total production 100% 75%Protein meal exports as % of total production - 25%

Source: USDA FAS, Nomura research

Indian oil production unlikely to match demand this year The Indian oilseed crop has historically been insufficient to match oil demand, and the

situation is expected to continue this year. Total edible oil availability is only expectedto be ~8mn mT, vs the requirement of 16mn mT (ex-fats).

China consumes soybean oil;India prefers palm oil

India produces roughly half theedible oil it needs


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Exhibit 20. Estimates of India Oilseeds Crop for 2009/10F

Marketable surplus for crushingand oil availability (mn mT)

Oil recovery(%)

Oilseeds(mn mT) Summer crop Winter crop

Totalmarketable

surplus(mn mT)

Total oilavailability

(mn mT)

A. OilseedsGroundnut (in shell) 40 5.12 3.29 1.83 1.52 0.61

Soybean 17 8.5 8.5 - 7.5 1.28Rapeseed / mustard / toria 33 6.42 0.1 6.32 6.22 2.05Sunflower 35 0.99 0.32 0.67 0.98 0.34Others 2.08 1.44 0.64 1.74 0.76Sub-total 23.11 13.65 7.63 17.96 5.04B. Other OilseedsCottonseed 12.5 9.15 9.15 - 8.65 1.08Copra 65 0.66 0.66 - 0.66 0.43Subtotal 9.81 9.81 - 9.31 1.51C. Secondary source(Rice bran oil, oil cakes and minor oilseeds) 1.33 D. Butter, as fat 2.16

Grand total 10.04Source: KS Oils Company presentation

India is going to meet most of edible oil deficit through palm oilIndias total edible oil consumption is expected to grow at a CAGR of 8.6% over 2007-11F. Most of this incremental oil demand is going to be met by palm oil, whoseshare 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 playersin 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

0

2,000

4,0006,000

8,000

10,000

12,000

14,000

16,000

18,000

06/07 07/08 08/09 09/10F 10/11F

Palm SoybeanRapeseed PeanutCottonseed SunflowerseedOther

(000 mT)

Source: USDA FAS

Exhibit 22. Share of palm in consumption is growing

31 3944 43 46

2118 16 17

1618 15

14 14 1412 12 10 9 9

18 16 17 16 15

0102030

40

506070

8090

100

06/07 07/08 08/09 09/10F 10/11F

Palm Soybean Rapeseed Peanut Others(%)

Source: USDA FAS

Indias edible oil import deficit willbe met by imports of palm oil, inour view


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Meal market dynamics are different in India

Indian protein meal market dynamicswork different from China ...India produces about 16mn mT of protein meal annually, mainly soybean meal (~39%)and mustard meal (~22%). This represents ~6.2% of world production, but is only

about 1/10 of Chinese meal output, as China imports raw soybean instead of oils.

as India exports ~25% of its meal productionIndia exports about 4mn mT of protein meal, (25% of its total production) to other countries, such as South Korea, the Middle Eastern countries and the EU. About 80%of these exports are soybean meal, and India is the fourth-largest meal exporter in theworld, with a ~5% market share.

As per the ERS department of the USDA, Indian soybean meal offers better price andquality competitiveness in the world markets than other Indian meals. This is partly dueto the fact that soybeans are a relatively new crop in India, and so most of theprocessing facilities are relatively modern and technologically advanced, as opposedto mustard, which have been there since decades.

Meal market in India is small, but growingAlthough Chinese edible oil market is about 1.8x the size of India, the Chinese mealmarket is ~5x the size of India. This is due to lower consumption of meal in cattle, andother cheaper alternatives available in India. However with the strong growth of Indianpoultry and egg producers, exports of Indian oilmeal have come down as percentageof production. Also, with the minimum support pricing mechanism, the price of Indiansoybean meal has been firm, reducing their price competitiveness compared to theworld.

Exhibit 23. Indian meal exports are forecast to decline further

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

1 9 7 1

1 9 7 3

1 9 7 5

1 9 7 7

1 9 7 9

1 9 8 1

1 9 8 3

1 9 8 5

1 9 8 7

1 9 8 9

1 9 9 1

1 9 9 3

1 9 9 5

1 9 9 7

1 9 9 9

2 0 0 1

2 0 0 3

2 0 0 5

2 0 0 7

2 0 0 9

2 0 1 1 F

0

5

10

15

20

25

30

35

40

45Meal exports (LHS)Meal production (LHS)Exports as % of production (RHS)

(000 mT) (%)

Source: USDA FAS

So the main profit driver for processors is oil, not mealPrices of Indian oil meal do not fluctuate much, due to a small domestic market andthe export market being flooded by meal from other big producers like Argentina andBrazil. So the main profit driver for Indian oilseed processors is oil and not meal, in our view. Although oil comprises only ~18% of the oilseed output by volume (soybean) and35% of the volume (mustard), it accounts for >50% of the total value of the output.Thus, Indian oilseed crush margins are still very much dependent on oil prices.

Indian meal market is not as bigas China

However, it is growing withdemand as animal feed increasing


17/78



Exhibit 24. India soybean crushing margins

(2,000)(1,000)

0

1,0002,0003,000

4,000

5,0006,0007,000

J a n - 0

8

M a r - 0 8

M a y - 0

8

J u l - 0 8

S e p - 0

8

N o v - 0

8

J a n - 0

9

M a r - 0 9

M a y - 0

9

J u l - 0 9

S e p - 0

9

N o v - 0

9

J a n - 1

0

M a r - 1 0

M a y - 1

0

J u l - 1 0

S e p - 1

00

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000Soybean crushing margins (LHS)Soybean price (RHS)Soymeal (RHS)Soy oil (RHS)

(Rs/mT) (Rs/mT)

Source: Bloomberg, Nomura research


18/78



Indian edible oil industry is fragmented and underutilised

Indian edible oil industry is fragmentedand capacity utilisation is lowOwing to the Indian government policies that have regulated plant scale and setincentives for building new processing facilities, the Indian oilseed processing

landscape is dotted with small units, with non-technologically advanced processesrunning at very low utilisation rates. Although a number of inefficient units have closeddown after reduction of high import tariffs on edible oils made importing oils feasibleinstead of processing locally, the average utilisation rates of Indian oilseed processorsis still very low (~30-40%), as they operate only during the local harvest season of rawmaterials. To put this into perspective, capacity utilisation in developed nations, like theUS are close to 92-96%, average size of their units are roughly six times the size of Indian units, thus giving them better scale and lower marginal cost of production.

Exhibit 25. Indian oilseed market process flow chart

Note: 1. Solvent extraction is used for raw materials, such as soybeans, cottonseed, and expeller oilcake with lessthan 20% oil content

Source: ERS Report on Indian Agriculture, Nomura research

Exhibit 26. Indian oilseed processing capacity

Capacity (1)Total Average Utilisation

Units (mn mT) (mT/day) (%)

Mechanical crushing:Ghanis 130,000 2 0.05 10Expellers 20,000 40.5 7 30-40 Solvent extraction 2 711 36 157 40-50Vanaspati 241 4.8 66 35Oil 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

A large number of small scaleproducers running at lowutilisations characterise Indianedible oil industry


19/78



Ruchi Soya and KS Oils are largest listed processors bycapacityA number of Indian and foreign oilseed players have developed significant oilseedprocessing capacity, and are likely to be beneficiaries of any consolidation in thesector, in our view. Among the listed players, Ruchi Soya, which is the leader in palmand soybean oil and KS Oils, which has the highest market share in mustard oil, have

the largest capacities. Adani-Wilmar, a JV between the Adani Group and Wilmar International, has invested significant capex over the past few years, into building thesecond largest processing capacity. However, even if we assume complete utilisationof these established players capacity, they only account for 32% of the total oilseedscrushed and 25.7% of total refining. This reaffirms our view that there is still significantroom for capacity expansion and consolidation among Indias edible oil space, which isstill largely unorganised.

Exhibit 27. Indian oilseed processing capacity

Crushing Refining Potential market share of Indias total (%)Capacity (mT/day) (mT/day) Crushing Refining

Ruchi Soya 12,700 7,370 13.7 13.4Adani Wilmar 5,675 3,430 6.1 6.3KS Oils 4,800 1,800 5.2 3.3Guj. Ambu. Exp. 3,300 1,200 3.6 2.2Sanwaria Agro 3,250 300 3.5 0.5Total 29,725 14,100 32.1 25.7

Note: Potential market share assumes 100% utilisation

Source: Ruchi Soya presentation

Recent consolidation to continue, the top players will capturethe growth, in our viewOwing to the recent financial crisis, several poor harvests and reduction in importduties on edible oil, quite a few small scale solvent extractors and refiners have closeddown, or been taken over by larger players in the industry. The number of solventextractors has reduced from 766 to 711 and refiners have come down from 800 to~600 since 2005. We expect this to be an ongoing trend; as larger players haveseveral key advantages such as being able to sustain a price war, access to cheaper credit from MNC banks and markets, lower marginal cost of production, and possibilityof backward integration. The larger players are more likely to achieve positive crushingmargins, even if price of oils and meals corrects severely, but the price of raw oilseedsare not allowed to go below their Minimum Support Price, in our view.

We think larger players like Ruchi Soya, KS Oils, Adani-Wilmar can benefit in two ways:1) from increasing capacity utilisation and 2) consolidation in the industry, and willlikely 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 150Steam 155 65 150 90 175 100 150 90Hexane 125 70 134 100 108 55 134 100Labour 255 195 128 100 210 140 128 100Interest 156 156 120 96 157 157 120 96Other 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

Ruchi Soya and KS Oils offer thelargest listed exposure to Indianedible oil industry

The larger players stand to gainthe most


20/78



Branded sales CAGR of 25-30% expected

India still an untapped branded oilmarketBranded sales of edible oil in India at ~US$4bn comprise only about 25% of the totaledible oil market of INR750bn (~US$16bn), with most lower-income consumers opting

for cheaper oils sold in loose form. However, with increasing quality consciousness,rising incomes and consolidation in the edible oil space, industry experts suggestbranded sales are likely to grow at ~25-30% over the next few years, as opposed tothe total market growth at ~7% pa, and as per our calculations the branded market willrepresent ~55-60% of the total market by 2015F.

Exhibit 29. Branded edible oil market is forecast to grow at 25-30% pa

188

632

563

420

0

200

400

600

800

1,000

1,200

2010 2015F

Branded sales Unbranded sales(Rs bn)

Branded CAGR =25-30%

Overall growth = 7%


As per industry data, only about 31% of urban households and about 9% of ruralhouseholds consume branded edible oils, with the national average at ~16%. Thisrepresents a significant untapped opportunity, with a potential to grow to US$13.5bnby 2015F. We believe established players with scale like Ruchi Soya and KS Oils willbe the key beneficiaries of this deeper penetration.

Exhibit 30. Proportion of Indias deprived is falling

80.0% 72.0%56.0% 52.0%

18.0%22.0%

32.0% 34.0%

5.7% 11.4% 12.8%2.7%

1.7%1.1%0.4%0.2%

0

20

40

60

80

100

1995-96 2001-02 2007-08 2009-10F

Deprived Aspirers Middle class Rich

(%)

Source: Images Retail 2009

Proportion of pack oil sales inIndia is still very low

Millions are climbing out of poverty and becomingconsumers


21/78



Palm is still largely an unbranded story; sunflower oil has thehighest proportion of packaged salesAmong the major edible oils, palm oil is still largely traded as a commodity and soldmostly in loose form, although players such as Ruchi Soya have their palm oil brands(Ruchi Gold). Sunflower oil on the other hand is mostly sold in packaged form. Mustardoil, which is one of the more recent oils to be liberalised, is still sold 70% in unbranded

form.

Exhibit 31. Branded proportion and typical margins

Proportion of branded sales (%)Branded Unbranded

Soybean oil 55 45Palm oil 10-20 80-90Mustard oil 30 70Sunflower oil 70 30


Ruchi Soya and Adani-Wilmar lead branded market shareThe branded edible oil industry has consolidated, with the top-five players having 57%of the market. Ruchi Soya, along with Adani-Wilmar, is the leading consumer packdistributer with its leading brands in soy oil and vanaspati (hydrogenated oil). Theleading players are incrementally focusing on improving the branded part of valuechain as it is a high-margin business and growth should be significant, led by structuralindustry shift from unbranded to branded products.

Exhibit 32. Consumer pack oil market share by value

Consumer pack oil market share by value (%)2004 2005 2006 2007 2008

Ruchi Soya 18.1 16.6 17.3 17.5 17.3Adani Wilmar 16.3 16.4 17.3 16.1 16.5Cargill 14.9 16.8 13.1 11.8 10.2Agro Tech 9.7 8.2 7.2 6.9 6.3Kaleesuwari 8.5 7.6 6.9 6.8 6.7

Source: Ruchi Soya presentation

Exhibit 33. Brand portfolio for Indian players

Adani-Wilmar Ruchi Soya KS OilsSoybean Oil Fortune Soya Health Nutrela, Mahakosh KalashMustard Oil Fortune Kacchi Ghani

Pure Mustard OilNutrela, Mahakosh,Ruchi Gold

Kalash, Double Sher

Palm Oil Raag Gold Ruchi Gold KS GoldSunflower Oil Fortune Sunlite Nutrela, Mahakosh KalashVanaspati Avsar Nutri Gold KS Gold

Source: Nomura research

Palm oil is still sold mostly inloose form

Adani Wilmar is a formidablecompetitor in our view


22/78



Exhibit 34. Key edible oil players: product portfolio

Source: Nomura research


23/78



A leading edible oil consumer

India a dominant edible oil demanddriver with significant oil deficit

India accounts for a major part of global edible oil demand

India is one of the worlds leading consumers and importers of vegetable oils. As per USDA estimates, India is the third largest consumer of edible oils (after China and theEU-27 countries), and will account for 11% of global edible oil demand and 16% of global imports in 2010/11F. Indian consumption and import growth is however expected to outpace all the major countries, including China, with a forecast 2007-11Fdemand CAGR of 8.6% (vis--vis China at 7.2% and the world at 3.6%) and importgrowth CAGR of 14.6% (China at 6.4% and the world at 5.5%). We believe at this rateof growth, India will surpass China in oil imports over the next few years.

Exhibit 35. Total vegetable oil consumption (mn mT)

06/07 07/08 08/09 09/10F 10/11F

07-11F

CAGR (%)China 22.6 23.3 24.7 27.2 29.8 7.2EU-27 21.7 22.4 23.1 23.7 24.1 2.7India 11.8 13.0 14.8 15.6 16.5 8.6Others 63.2 67.1 67.9 71.1 73.8 4.0Total 119.3 125.9 130.4 137.6 144.2 4.9

India % of total 9.9 10.3 11.3 11.4 11.4

Source: USDA FAS

Exhibit 36. Total vegetable oil imports (mn mT)

Imports 06/07 07/08 08/09 09/10F 10/11F

07-11F

CAGR (%)China 8.5 8.8 9.8 9.7 10.9 6.4India 5.4 5.9 8.8 8.7 9.4 14.6EU-27 9.0 9.0 9.1 8.5 8.8 (0.5)Others 24.1 27.2 26.6 28.2 29.1 4.9Total 47.0 50.9 54.2 55.1 58.2 5.5

India % of total 11.6 11.6 16.2 15.8 16.1

Source: USDA FAS

Exhibit 37. India major oil production and consumption

Attribute Country 2006/2007 2007/2008 2008/2009 2009/2010F 2010/2011FPalm oilProduction India 50 50 50 50 50

World 37,248 40,947 43,852 45,552 49,337India as % of world 0.1 0.1 0.1 0.1 0.1

Domestic consumption India 3,671 5,065 6,475 6,750 7,550World 35,878 39,754 42,839 45,000 47,946India as % of world 10.2 12.7 15.1 15.0 15.7

Mustard oilProduction India 2,135 1,968 2,058 2,230 2,265


Domestic consumption India 2,133 1,967 2,095 2,252 2,287World 17,522 18,474 20,125 22,015 22,238

India as % of world 12.2 10.6 10.4 10.2 10.3Soybean oilProduction India 1,157 1,499 1,287 1,190 1,385


Domestic consumption India 2,500 2,330 2,300 2,670 2,600World 35,386 37,761 35,912 38,065 40,971India as % of world 7.1 6.2 6.4 7.0 6.3

Source: USDA FAS

The USDA expects India toaccount for 11% of globalvegetable oil demand in 2010/11F


24/78



Indian oil consumption has grown over the years, but domesticproduction has remained stagnantOver 2004/09, local production of vegetable oils in India has seen a CAGR of only0.2%. On the other hand, consumption has grown 6% annually, resulting in a wideningdemand production gap. We estimate a production deficit of 9.3mn mT in 2010/11F, up135% since 2003/04, and think that this deficit will widen over the medium-long term.

Exhibit 38. Indian vegetable oil production and consumption

0

24

6

8

10

12

14

16

18

03/04 04/05 05/06 06/07 07/08 08/09 09/10F 10/11F0

12

3

4

5

6

7

8

9

10India production (LHS)

India consumption (LHS)

Demand-Production Gap (RHS)

(mn mT) (mn mT)

Source: USDA FAS

resulting in lower import tariffs and higher importsBetween 2001 and 2008, import duties on imported crude soya / palm oil wereprohibitively high, at 40-90%. The increasing gap between production andconsumption resulted in the government rethinking these protectionist tariffs and therevising down these duties to 7.5% for refined palm / soybean oil and 0% for crude

palm / soybean oil. This has resulted in imports of oils surging to address demand,with imports rising 49% in 2009. We think these import duties will remain low in thefuture, and import volumes will remain strong, as we believe the government willprioritise food security and domestic oil production is unlikely to ramp up significantly.

Exhibit 39. Indian edible oil import duties

0

20

40

60

80

100

120

J a n / 0 0

J a n / 0 1

J a n / 0 2

J a n / 0 3

J a n / 0 4

J a n / 0 5

J a n / 0 6

J a n / 0 7

J a n / 0 8

J a n / 0 9

J a n / 1 0

CPO and Crude OleinRefined Palm Oil and RBD PalmoleinDegummed soybean oil (crude)Refined soybean oil

(%)

Source: SEA of India

Exhibit 40. Total oil imports

0123456

789

10

0 3 / 0 4

0 4 / 0 5

0 5 / 0 6

0 6 / 0 7

0 7 / 0 8

0 8 / 0 9

0 9 / 1 0 F

1 0 / 1 1 F

(mn mT)

Import dutiesslashed

Source: USDA FAS

The demand supply gap is rising

And dependence on imports inincreasing


25/78



Indian oilseed production has only increased marginally;however, share of global production has remained stableIndias total oilseed output has not grown in step with edible oil demand, growing at aCAGR of only 2.3% over 2004-09. This is exacerbated by unpredictable weather anddroughts which have impacted production in various years. However, Indias share of world oilseed production has remained stable at 7-9% over the years. As per the

USDA, cottonseed is Indias major oilseed crop, followed by soybeans and rapeseed.

Exhibit 41. India: total oilseed production

2627282930313233343536

0 3 / 0 4

0 4 / 0 5

0 5 / 0 6

0 6 / 0 7

0 7 / 0 8

0 8 / 0 9

0 9 / 1 0 F

1 0 / 1 1 F

6.0

6.5

7.0

7.5

8.0

8.5

9.0India (LHS) India % of world (RHS)(mn mT) (%)

Source: USDA FAS

Exhibit 42. India: what constitutes total output(09/10)

USA24%

Others29%

China13%

Brazil16%

Argentina12%

India

8%

Sunflowerseed0%

Peanut1%

Rapeseed1%

Soybean2%

Cottonseed2%

Other 0%

Source: USDA FAS

Area under soybean cultivation has increased; yields still lowAgricultural land devoted to oilseed cultivation in India has increased at a slow pace,growing only 14% since 2000 to 39.5mn ha in 2009. However, area under soybean

cultivation has increased significantly, up 49% to 9.6mn ha, whereas rapeseed is flat at6.2mn ha. Area under cottonseed, which is Indias largest oilseed crop, has also grown18% since 2000. However, Indian yields are still low compared to some of its moredeveloped peers, due to insufficient irrigation, fertiliser usage, and the prohibition of genetically-modified crop. We think any government action to improve irrigationfacilities or policy changes to allow GM crop may lead to significant improvements inyields, which may increase Indian oilseed production.

Exhibit 43. India: Area under oilseed cultivation

0

5

10

15

20

25

30

35

40

45

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Groundnuts, with shell RapeseedSeed cotton SoybeansOthers

(mn ha)

Source: FAOStat

Oilseed production has not beenable to match up to demandgrowth

Indian crop yields are lowcompared to the world


26/78



Exhibit 44. India soybean yields: low

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

BrazilChinaIndiaUnited States of America

(mT/ha)

Low soy yields

Source: FAOStat

Exhibit 45. India rapeseed yields: low

0.0

0.5

1.0

1.5

2.0

2.5

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

BrazilChinaIndiaUnited States of America

(mT/ha)

Low rapeseed yields

Source: FAOStat

Until India becomes self-sufficient in oilseed output,incremental imports are going to fulfil edible oil demandWe expect the demand-production deficit to widen further and think that zero importduty on crude oils will continue over the medium term. With yields unlikely to surgeabruptly, we think edible oil imports will fulfil the ever increasing demand. Palm oil, dueto its low price and easy availability from neighbouring Malaysia and Indonesia, willaccount for a large part of incremental import growth, in our view. As of now, palm oilaccounts for 73% of total oil imports in India, making it the worlds largest consumer of the oil.

Exhibit 46. Indian edible oil imports: palm leads the way

0

1,0002,0003,0004,0005,0006,0007,0008,0009,000

10,000

02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10F 10/11F

Palm Soybean Sunflowerseed Rapeseed Other (000 MT)

Source: USDA FAS

Imports of oilseeds in India is almost non-existent due to policyrestrictions and lack of a viable meal marketThe government of India imposes several tariff and non-tariff restrictions on oilseedimports, due to which Indian oilseed imports are virtually non-existent. India imposes a30% import duty on oilseeds, and also prohibits imports of genetically-modified crop, toprotect 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, butmakes the cost of shipped soybeans prohibitively high. Also, if seeds are devitalisedby splitting them at the point of origin, they can degrade in quality during shipping.

Indian dependence on edible oilimports will continue in our view

Policy restrictions and lack of abig meal market make oilseedimports not very profitable


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India also does not have a viable meal market, and exports about 25% of its oil mealoutput. Lack of a local market and meal being one of the end products of crushingreduces the profitability of crushing locally. All these reasons make oilseed importsunfeasible and minimal, in our view.

however, the government may have to revisit restrictions if itwants to reduce edible oil import dependenceWith crop yields unlikely to jump in the near term, and edible oil demand continuing torise, the import dependence to bridge the gap between demand and supply willcontinue to increase, in our view. Currently, India is self-sufficient in meal demand anda net exporter, but this may change over the long term with higher domestic demandfrom the animal feed industry. A dual dependence on both meal and oil imports mayprompt the government to revisit import restrictions on oilseeds, in our view. Webelieve this may also be done in a phased manner, by imposing import quotas, so asto safeguard local growers crop off-take.

... which will be a positive for local processors in our viewWe think the removal of import restrictions will benefit the processors like Ruchi Soyaand KS Oils, with available capacity to crush the incremental imports, and will enablethem to also take part in additional meal output.

Exhibit 47. Indian share in world oilseed production and consumption

Attribute (mn mT) Country 2006/2007 2007/2008 2008/2009 2009/2010F 2010/2011FOilseedsProduction India 29.92 33.95 33.4 31.72 34.65

World 404.45 392.01 396.37 441.2 439.74India as % of world 7.4 8.7 8.4 7.2 7.9

Consumption India 24.49 27.79 26.14 25.01 27.8World 328.17 339.09 338.32 369.86 371India as % of world 7.5 8.2 7.7 6.8 7.5

Protein mealsExports India 5.22 6.6 4.63 3.41 4


Consumption India 9.09 9.49 10.3 10.89 11.95World 221.71 228.32 227.95 238.21 249.48India as % of world 4.1 4.2 4.5 4.6 4.8

Vegetable oilsProduction India 6.4 7.05 6.74 6.45 7.14


Consumption India 11.81 12.97 14.76 15.63 16.45World 119.3 125.87 130.44 137.61 144.19India as % of world 9.9 10.3 11.3 11.4 11.4

Source: USDA FAS

Although unlikely over the near term, the government may have toreconsider oilseed importregulations if it wants to reduceoil import dependence


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A snapshot of the three major oils

Palm, soybean and mustard oil are thethree pillarsPalm, soybean and mustard oil are the most consumed oils in India, collectivelyaccounting for ~75% of the countrys total oil demand. Mustard oil is almost entirely

produced within the country, whereas about 45% of soybean oil and almost the wholeof palm oil is imported in crude form and refined in either port based / hinterland basedrefineries. Mustard oil produced is almost entirely consumed, leaving very littleinventories at the end of the marketing year, which implies that there is room for capacity growth if crop output increases, 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 amuch faster rate (~15%) to address the demand.

As per USDA estimates, most of this demand growth will come from palm oil, (~20%CAGR), whereas mustard and soybean oil consumption will grow at only 1-2% pa.Stock usage ratios for Indian oils remain very low, partly due to the oil deficit status of the country.

Exhibit 48. Indian edible oil supply demand forecasts

Oil (000 MT) 2006/2007 2007/2008 2008/2009 2009/2010F 2010/2011F% CAGR (07-11F)

ProductionPalm 50 50 50 50 50 0.0 Rapeseed 2,135 1,968 2,058 2,230 2,265 1.5 Soybean 1,157 1,499 1,287 1,190 1,385 4.6 Others 3,062 3,531 3,348 2,983 3,436 2.9Total 6,404 7,048 6,743 6,453 7,136 2.7

3 as % of total 52 50 50 54 52 ImportsPalm 3,650 5,015 6,867 6,400 7,500 19.7 Rapeseed 0 0 42 23 23 naSoybean 1,447 733 1,060 1,500 1,180 (5.0)Others 343 169 818 780 685 18.9Total 5,440 5,917 8,787 8,703 9,388 14.6 3 as % of total 94 97 91 91 93Domestic consumptionPalm 3,671 5,065 6,475 6,750 7,550 19.8 Rapeseed 2,133 1,967 2,095 2,252 2,287 1.8 Soybean 2,500 2,330 2,300 2,670 2,600 1.0 Others 3,503 3,608 3,891 3,960 4,015 3.5 Total 11,807 12,970 14,761 15,632 16,452 8.6 3 as % of total 70 72 74 75 76 Ending stocksPalm 47 47 489 189 189 41.6 Rapeseed 0 0 4 4 4 naSoybean 172 58 103 121 84 (16.4)Others 107 157 419 209 302 29.6 Total 326 262 1,015 523 579 15.43 as % of total 67 40 59 60 48 Stock usage ratiosPalm 1.3 0.9 7.6 2.8 2.5Rapeseed 0.0 0.0 0.2 0.2 0.2

Soybean 6.9 2.5 4.5 4.5 3.2Total 2.8 2.0 6.9 3.3 3.5

Source: USDA FAS

A story of three oils palm,mustard and soybean

Demand growth is expected to bemet by palm oil


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The oils differ in fat composition and tasteWith increasing health consciousness among urban Indian consumers and to someextent in the rural markets, the focus has shifted to the suitability of cooking oils for theIndian consumer. Typically palm oil has one the highest percentages of saturated fats(~51%) which are perceived to be bad for the heart, whereas mustard oil has only ~7%,the lowest of the major oils. Soybean oil offers a more balanced composition, with

~62% of polyunsaturated fats (which are considered beneficial).We think this puts mustard oil and soybean oil producers like Ruchi Soya and KS Oilsin a sweet spot in case health becomes a deciding factor for the purchase. This islikely to be the case in affluent Indian households, which are increasing in number.These companies also produce branded sunflower oil for urban markets.

Exhibit 49. Oil fat content comparison

7

8

9

12

13

15

15

18

19

27

43

51

91

61

77

16

16

29

23

75

44

48

19

47

39

7

11

1

57

1

1

8

1

0

0

0

1

0

0

21

14

18

71

57

54

9

38

33

54

9

10

2

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Mustard Oil

Safflower Oil

Flaxseed Oil

Sunflower Oil

Corn Oil

Soybean Oil

Oilive Oil

Rice bran Oil

Peanut Oil

Cottonseed Oil

Lard

Palm Oil

Coconut Oil

Saturated Fat Monosaturated Fat Omega 3 Polyunsaturated Fat Omega 6 Polyunsaturated Fat

Note: Health benefits increase from left to right, ie Monosaturated fat is better for health than saturated fat; Source: KS Oils corporate presentation

Consumption is regional and consumer preference drivenOne important distinction between the edible oil consumption patters in India and other countries in the world is that Indian oil preferences differ on a regional basis. Thisarises in part due to availability and local taste preferences for oils. For instance,mustard oil has traditionally been very popular is eastern and north-eastern India, dueto the flavour it brings to seafood. Palm oil has increasingly become the oil of choice inSouth India due to its warmer climate (palm oil gets a cloudy appearance in colder North Indian climates and becomes unfit for consumption) and easy availability fromS.E. Asia through ports in the region. Soybean oil is prevalent in north and centralIndia due to the local availability of raw soybeans.

Exhibit 50. Regional oil preferences

Type of oil Preferred byMustard North-east, Central, North and East IndiaGroundnut West India

Palm Central and South IndiaSoybean North and Central IndiaSunflower Largely consumed in urban India, in small quantities

Source: Company data

Mustard and soybean oil areperceived to be healthier thanpalm

Oil consumption is regional andtaste preference driven


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implying Ruchi Soya and KS Oils serve non-overlappingconsumer beltsRuchi Soya, which is the market leader in soybean oil, serves mainly North andCentral India. On the other hand, KS Oils, whose primary output is mustard oil, servesNorth-East, Eastern, along with other parts of North and Central India. This creates anon-overlapping demand scenario for their outputs, separating their consumers.

Although the companies have recently ventured into each others territories, with RuchiSoya entering mustard oils through its Mahakosh and Ruchi Gold brands and KS Oilsproducing Kalash Soybean Oil, we think it will take time for them to make a reasonableimpact on the others market, given their leadership position. We also think there isless likelihood of Indian consumers with taste peculiarities to shift from one oil to theother (eg, fish and pickle can only be cooked in mustard oil due to its pungency andpreservative properties respectively).

Exhibit 51. Indian regional oil preferences

Note: Shaded region represents oilseed production belt of Rajasthan and Madhya Pradesh; Sunflower oil is mostlyconsumed in urban areas in small quantities

Source: KS Oils presentation

The companies have recentlydiversified into each othersterritories


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Palm oil is the next big opportunity

Palm oil: the next big opportunityWith soybean and rapeseed crop output hardly growing, palm oil has emerged as theanswer to Indias edible oil consumption. The share of palm oil in Indias consumptionis expected to increase from 31% in 2007 to 46% in 2011F, due to various reasons:

Easy availability from Malaysia and Indonesia. Cheaper alternative which suits the Indian price conscious consumer.

Zero duties on crude palm oil.

Drought in South America in 2008-09 decreasing soybean oil output and increasingprices.

This along with the fact that processing cost in palm oil are lower than other oils, hasled to most players like Ruchi Soya and KS Oils establishing or acquiring palm refiningcapacity, in our view.

Exhibit 52. SEA forecast for Indian imports in 2015(mn mT) 2015Total edible oil demand 22.5Total area under oilseeds (mn ha) 30Yield (mT/ha) 1.3Production of oilseeds 42Domestic supply of edible oils 12.5Total edible oil imports required 10Imports as share of demand (%) 44

Source: Company presentation

Exhibit 53. Current import duties on edible oilsEdible oils Duty (%) Non Edible oils Duty (%)

Crude Crude Palm Stearin 19.57Crude palm oil / olein 0 Crude Palm Kernel Oil 17.37Crude sunflower oil 0 Palm Fatty Acid Distillate

(P.F.A.D.)32.76

Crude rapeseed oil 0 Palm Kernel Fatty AcidDistillate (P.K.F.A.D.)

32.76

DG Soybean oil 0 Spilt Palm Kernel FattyAcid

32.76

RefinedVanaspati 12.03Refined palm oil/RBDpalmolein

7.73

Refined rapeseed oil 7.73Refined sunflower andother oils

7.73

Refined soybean oil 7.5


Palm oil imports steadily rising; soybean oil imports remainedconstantPalm oil monthly import data shows that the amount of imports has increased over theyears, especially after withdrawal of import tariffs in 2008. Soybean oil imports havemore or less remained steady on the other hand, with a highly seasonal import pattern

which peaks in June-October. Palm oil imports remain more or less steady throughoutthe year, only dipping slightly when soybean oil imports pick up.

The share of palm oil in Indiasconsumption is expected toincrease from 31% in 2007 to 46%in 2011F


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Exhibit 54. Monthly crude palm oil imports

India total CPO imports

0

100

200

300

400

500

600

J a n - 0

4

J u l - 0 4

J a n - 0

5

J u l - 0 5

J a n - 0

6

J u l - 0 6

J a n - 0

7

J u l - 0 7

J a n - 0

8

J u l - 0 8

J a n - 0

9

J u l - 0 9

J a n - 1

0

J u l - 1 0

('000 mT)


Exhibit 55. Monthly crude soybean oil imports

India total Crude Soy oil imports

0

50

100

150200

250

300

350

J a n - 0

4

J u l - 0 4

J a n - 0

5

J u l - 0 5

J a n - 0

6

J u l - 0 6

J a n - 0

7

J u l - 0 7

J a n - 0

8

J u l - 0 8

J a n - 0

9

J u l - 0 9

J a n - 1

0

J u l - 1 0

('000 mT)


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 SouthAmerican drought in 2008-09 decreased soybean oil imports and pushed prices up.

Exhibit 56. Seasonality in palm / soybean imports

50

100

150

200

250

300

350

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Average CPO import Average crude soybean oil import(000 MT)


However palm oil demand is price driven; may fall if it trades atparity to other oilsOne of the reasons for palm oils popularity is its low price. However, during periodswhere the average discount of palm oil to soybean oil has narrowed significantly, palmoil imports have dropped as refiners have switched to other oils like soybean. This putsa strong cap on CPO prices in India, as although Indias dependence on palm oilcannot be entirely withdrawn, importers can temporarily shift to soybean till CPO pricescool down.

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 onlyin June due to anticipated festive demand.

Palm oil imports may fall if ittrades at parity to soybean oil inour view


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Exhibit 57. CPO imports fall when discount narrows and vice versa

0

100

200

300

400

500

600

M a r - 0 7

M a y - 0

7

J u l - 0 7

S e p - 0

7

N o v - 0

7

J a n - 0

8

M a r - 0 8

M a y - 0

8

J u l - 0 8

S e p - 0

8

N o v - 0

8

J a n - 0

9

M a r - 0 9

M a y - 0

9

J u l - 0 9

S e p - 0

9

N o v - 0

9

J a n - 1

0

M a r - 1 0

M a y - 1

0

J u l - 1 0

(50)(45)(40)(35)(30)(25)(20)(15)(10)(5)05

India Crude Palm Oil ImportsCPO discount to soybean oil (RHS)

(000 MT) (%)

Source: Bloomberg, SEA of India, Nomura research

Exhibit 58. Import prices of CPO and soybean oil

0200400600800

1,0001,2001,4001,6001,800

D e c - 0

6

M a r - 0

7

J u n - 0

7

S e p - 0

7

D e c - 0

7

M a r - 0

8

J u n - 0

8

S e p - 0

8

D e c - 0

8

M a r - 0

9

J u n - 0

9

S e p - 0

9

D e c - 0

9

M a r - 1

0

J u n - 1

0

India CPO import price CIF Mumbai

India Soyoil import price CIF Mumbai

(US$/MT)

Source: Bloomberg

Palm refining margins are better than soybean or sunflower oilPalm refining margins are better than soybean or sunflower oil mainly due to lower cost of palm and fewer number of steps in palm refining process (see appendix).Processing costs for palm are ~INR1.25/kg (~US$30/mT) and for soybean andsunflower around INR2.25/kg (~US$45/mT). This is another reason why most Indiannames, including Ruchi Soya, are expanding capacities in palm refining. Refiningmargins are generally around 2-2.5% on a cost basis. These are lower than those

realised in other countries due to the price sensitivity of Indian consumers.

Processing costs for palm oil arelower than other oils


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Exhibit 59. India implied refining margins

(2,000)

0

2,000

4,0006,000

8,000

10,000

12,000

J a n - 0

9

F e b - 0

9

M a r - 0 9

A p r - 0 9

M a y - 0

9

J u n - 0

9

J u l - 0 9

A u g - 0

9

S e p - 0

9

O c t - 0 9

N o v - 0

9

D e c - 0

9

J a n - 1

0

F e b - 1

0

M a r - 1 0

A p r - 1 0

M a y - 1

0

J u n - 1

0

J u l - 1 0

A u g - 1

0

S e p - 1

0

Soybean oil refining margins

Palm oil refining margins

(Rs/mT)

Source: Bloomberg, Nomura research

Everyone wants a share of the palm oil marketMost Indian edible oil players have recognised palms opportunity, and have rushed into build palm refining capacities. Some, like Ruchi Soya and KS Oils, have alsoventured into oil palm cultivation, to reduce their dependence on imports and removeprice risk. Both companies have also taken the M&A route to accelerate growth in thepalm market.

Exhibit 60. Ruchi Soya and KS Oils in the oil palm industry

Ruchi Soya KS OilsPalm refining Plans to expand palm refining

capacity by 1mn mT/year to 3.1mnmT by 2012.

Setting up an additional 1000mT/daypalm refining operation at itsPatalganga plant.

Acquired a port based refinery inHaldia with a capacity of 500mT/dayfor INR1500mn.

Palm cultivation After the acquisition of Palm TechIndia early this year, has rights todevelop ~169,000ha of palm land inIndia.

It currently has about 750ha of planted plasma plantations inIndonesia and is targeting plantingabout 36,000ha in medium termyears.


Recent initiatives in palm oil byRuchi Soya and KS Oils


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Mustard oil industry growth to come from branded sales

Mustard oil limited volume growth butmargin accretion through branded salesWe think volume growth in the Indian mustard oil market will be muted, due to limitedcrop availability and practically no imports of the oil. Mustard oil production is slated to

remain fairly stagnant, growing at 1.5% pa over 2007-11F; however, a large part of themustard oil segment comprises small unorganised players and unbranded sales. KSOils has the largest mustard oil processing capacity in India at ~4,400mT/day, andmanagement targets to increase its market share in the mustard segment from 12.5%to 20% over the medium term. This would lead to higher realisations, and marginenhancement in our view. As mustard oil has been the last oil to be liberalised in Indiaand has one of the higher margins, large players have entered the space recently tocapitalise on the mustard opportunity.

Mustard is easy to grow with a high oil yieldMustard is easy to grow, and does not need extensive irrigation facilities, and is

generally pest-resistant. It is consumed mostly as a virgin oil (without refining, topreserve its taste and pungency), so there is no import market. Mustard is primarilygrown in Rajasthan in India, and mustard oil is the oil of choice in eastern and northeastern India. Oil yield from mustard is about 42%, with about 35% of the oil extractedduring three stages in the oil mill (Kachi Ghani) and the final 7% extracted throughsolvent extraction (it is in non-edible form and is then refined to form edible oil).

Mustard meal has a 37% protein content (low

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Agriculture Nomura Sept10[1]