Basmati industry revenue growth to drop to 4% this fiscal on dip in paddy prices, says CRISIL

India’s basmati industry will see its revenue growth moderate to about 4 per cent year-on-year (y-o-y) this fiscal from a phenomenal 20 per cent witnessed last fiscal. Despite moderation, the revenue is expected to touch an all-time high of about ₹70,000 crore, driven by policy support in the form of removal of minimum export price (MEP) and rising demand in both domestic and international markets. These tailwinds, combined with likely fall in input costs, will raise the operating margins for players this fiscal.

Strong profitability will minimise the need for debt to fund capital expenditure and to replenish inventory, thereby maintaining stable credit profiles. An analysis by CRISIL Ratings of 43 companies accounting for 45 per cent of the overall Indian basmati industry by revenue indicates as much.

On September 14, 2024, the central government announced the immediate removal of MEP to support the export of basmati rice. The announcement, which follows adequate availability of basmati rice in domestic market, should help enhance exports, CRISIL said.

Initially, the Centre fixed an MEP of $1,200 per tonne on basmati rice in August 2023as a temporary measure, in response to the rising domestic prices of rice. It was later cut to $950. Following the removal of MEP, players will now be able to export basmati rice where realisation is lower than the MEP. This will help the Indian Basmati industry to cater to overseas markets in lower price segments.

Securing food supplies

Nitin Kansal, Director, CRISIL Ratings said, “Exports, which form about 72 per cent of basmati rice sales, are likely to grow 3-4 per cent on-year this fiscal as countries look to secure their food supplies amid geopolitical uncertainties. Domestic sales are likely to rise by around 6 per cent, driven by demand from the HoReCa (hotel, restaurant and café) segment, lower prices, and a steady rise in household income.”

Volume growth is expected to be around 10 per cent (about 9 million tonne), which will be enough to offset a nearly 5 per cent fall in realisation and lead to an increase in the overall industry revenue. The fall in realisation will be due to a decline in paddy prices, however, the fall will be limited owing to steady demand.

A steeper fall in input prices will raise operating margins of basmati rice manufacturers by 50-75 bps, to about 6.7-7 per cent this fiscal. Paddy prices are expected to fall 10-12 per cent this fiscal because of a larger harvest expected owing to a normal monsoon, and an increase in sowing acreage.

The higher paddy output, lower procurement price and steady demand will encourage players to replenish their stocks, which had dropped to the lowest level (110-120 days) seen in past five years as demand outpaced procurement in the post-pandemic world. This re-stocking should cause the inventory to revert to the normative levels of 140-150 days by end of this fiscal. The rise in procurement will, however, crank up the working capital requirement.

Smriti Singh, Team Leader, CRISIL Ratings, “Basmati rice companies are expected to increase their processing and packaging capacities by about 10 per cent on-year this fiscal to meet the growing demand. Debt levels are seen stable as companies are expected to fund capex and increased procurement using healthy accrual flowing from higher revenue and profitability. That would lead to stable credit profiles.”