India: Time to sizzle

- Initiate BUYs on Ruchi Soya, KS Oils; reaffirm BUY on Wilmar "We think Ruchi Soya’s targeted growth, with its exposure to palm plantation and dominant position in soybean processing and edible oil refining in India justify a rerating. KS Oils is the market leader in mustard and capacity utilisation should help it capture further market share, and thus we believe the correction due to corporate governance concerns (post the recent tax raids) is overdone and the stock is looking attractive, trading at just 9.1x FY12F P/E. Wilmar, we believe, is a good 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."
- 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 China’s market size today, implying a CAGR of 7%. More importantly, with 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 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 palm "Domestic consumption is expected to outstrip production growth (~2.7%), implying imports must grow at a much faster rate (~15%) to fill the demand. As acreage opportunities are limited in other crops, most of this demand growth will come from palm oil (~20% CAGR). Thus the players with refining / upstream exposure to palm stand to gain market share and volumes, in our view."
- Consolidation is the theme, with few players dominating the market "Due to the recent financial crisis, several poor harvests and reduction in import duties on edible oil, a lot of small scale solvent extractors and refiners have closed down, or been taken over by larger players in the industry. We expect this to be an ongoing trend; as larger players have several 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 possibility of backward integration."

Nomura India Agri Related Sep2010

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