Table of Contents

1. Executive Summary ............................................................................................................................. 2 2. Background ......................................................................................................................................... 3 2.1 Supply and Demand ...................................................................................................................... 3 2.1.1 Present Scenario .................................................................................................................... 3 2.1.2 Future Trends ......................................................................................................................... 4 2.1.3 Inadequate Domestic Production of edible oil ...................................................................... 4 2.1.4 Role of Trade Policies ............................................................................................................. 6 2.1.5 Consumption Shifts towards Imported Palm and Soybean Oils ............................................ 6 2.2 Domestic and Import Sources ....................................................................................................... 7 3. Business Models................................................................................................................................ 11 3.1 Trading of imported edible oils ................................................................................................... 11 3.1.1. Competition ........................................................................................................................ 13 3.2 Marketing of branded edible oils ................................................................................................ 13 3.2.1 Challenges in marketing of branded edible oil .................................................................... 14 3.2.2 Distribution Network ........................................................................................................... 14 3.2.3 Competition ......................................................................................................................... 15 3.3 Joint Venture with foreign supplier ............................................................................................ 15 3.4 Taking positions on future edible oil prices in commodity and spot markets ............................ 16 4. Cost Structure ................................................................................................................................... 17 5. Factors influencing domestic Edible oil prices .................................................................................. 18 6. Business Plan 2010-2015.................................................................................................................. 19 6.1 Business Directions ..................................................................................................................... 19 6.2 Projections .................................................................................................................................. 19

1. Executive Summary
India is the worlds leading importer of edible oils ahead of the EU and China. In 2008-09, India imported 8,183,360 tonnes of edible oil up from 5,608,410 tonnes in 2007-08. Edible oil imports have shown an average growth rate of 17.22% in the last 5 year time period from 2003 to 2008. There is a tremendous potential for business opportunities in edible oil import and trading, marketing of edible oil brands and commodity trading of edible oil varieties in spot and future markets in India. The purpose of this report is to explain the current scenario of the Indian edible oil market, suggest business models of various business opportunities relating to edible oils which Sterling Agro could consider venturing into, analyze the competition and challenges in each of these models and also evaluate the profitability of these business models by developing their cost structures, projected future revenues and profits. This report comprises of an analysis of the Indian edible oil market covering the demand-supply pattern of edible oil in India, the domestic production of different edible oil varieties and the information on imports of different edible oil varieties to meet the gap in the demand and supply of these varieties. The report then elaborates the following business models, along with the corresponding competitive forces and business challenges, which Sterling Agro could consider venturing into: Trading by import crude edible oil varieties and selling to small and regional oil marketing firms Marketing of edible oil brands such as done by firms like Adani Wilmar (Fortune, Kings and other brands), Ruchi Soya (Nutrela, Nutri Gold and Mahakosh brands), etc Entering into Joint Venture with a major foreign supplier with oilseed plantations to take advantage of vertical integration in the supply channel similar to the JV between Adnai Group and Wilmar Group Commodity trading of edible oil varieties in both spot and futures markets by taking positions in future prices of oils On the basis of the detailed analysis and evaluation of different business models and opportunities, the report finally recommends the business opportunities which would be most lucrative for Sterling Agro to pursue.

2. Background
India is the world's leading importer of edible oils ahead of the European Union and China. India has changed from a relatively small importer of edible oils in the mid-1990s to the worlds leading net importer since 1998. The import of edible oil has been increasing over the past five years. A large population and steady economic growth are important contributors to India's increasing consumption and imports of edible oils. With more than a billion consumers and a pattern of sustained economic growth, imports are likely to remain an important source of supply for Indias growing consumption. Trade policy reforms pursued by government since the mid-1990s have increased market access and facilitated edible oil imports. Moreover, the domestic production of edible oil in India will not be able to meet the growing consumption pattern both due to the insufficient domestic supply of oilseeds and the inability of Indias inefficient edible oil sector to compete with vegetable oil imports. So considering these factors, Indias edible imports will continue to grow to meet rising demands.

2.1 Supply and Demand

2.1.1 Present Scenario Consumption trends of edible oil in India over the years are marked by rising overall consumption. However, the domestic production and supply has not been enough to meet the rising demand leading to a marked increase in edible oil imports over the recent years. The table below shows the domestic supply and the total import of edible oils from 2001 to Feb. 2010. Edible Oil Production and Import Figures for India Units (in lakh metric tonnes) Oil Marketing Year (Nov. - Oct.) 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 Total Imports 44.25 51.14 43.97 50.42 44.17 47.15 56.08 81.83 Total Domestic Production 61.46 46.64 71.4 72.47 83.16 73.7 86.54 67 Per Capita Consumption (in kg p.a.) 10.24 11.0 11.1 11.4 11.7 12.1 12.5 12.9

Nov. 2009 - Feb. 2010 29.73 Source: http://www.seaofindia.com/, The Solvent Extractors' Association of India website The data above clearly shows that the domestic supply of edible oils have been unable to meet the rising demand resulting in increased imports. Moreover, the per capita consumption of fats and edible oils in India is still way below the Chinese per capita consumption and US per capita consumption. It is even below the per capita consumption of Pakistan as shown in the table below: 3

Per Capita Consumption of Oils and Fats in major countries (Kg. Per annum) Country 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 India 12.9 12.5 12.1 11.7 11.4 11.1 11.0 USA 55.3 54.9 53.8 52.7 50.6 48.6 48.9 EU 58.1 57.3 56.9 53.6 49.0 45.5 45.1 China 23.1 22.7 21.7 20.6 19.7 18.6 17.2 Pakistan 21.9 21.7 21.6 21.1 20.5 19.5 19.4 Source: The Solvent Extractors' Association of India, Handbook 2009 With strong GDP growth, increasing per capita income and standards of living, the per capita edible consumption can only increase further. However, the domestic supply is not geared up to match the increasing demand which indicates the edible oil imports will only grow further in the future. 2.1.2 Future Trends According to FAO, a conservative estimate is that the demand for edible oils in India is going to increase at an average annual rate of around 15% till 2015. The domestic production of edible oil will not experience the same growth rate leading to an above 15% average annual rise in imports. Apart from the increase in edible oil imports, prices of edible oil will also continue to rise in the future as indicated by the pattern of price rise in the past 2-3 years (Price data is collated in tabular form in the Price Sheet section). So, the future outlook of edible oils business looks positive with both rise in demand (and hence imports) and domestic prices of different edible oils 2.1.3 Inadequate Domestic Production of edible oil Some of the major factors for the inadequate domestic production of edible oils are as follows: 1. Low Yield of Indian Oilseed Production While strong demand and the emergence of a more liberal edible oil trade regime in the mid1990s were key factors underlying the surge of Indian imports, stagnating domestic oilseed production also played an important role. Indias oilseed sector is beset by a number of structural and policy-induced problems that have hindered its ability to meet rising demand, as evidenced by declining production and poor yields. One factor contributing to insufficient domestic supply of oilseeds is Indias domestic price support program which has often favoured production of crops that compete for area with oilseeds. Under the Minimum Support Price (MSP) program, the Indian Government annually sets minimum prices - based primarily on estimated production costs - for crops such as rice, wheat, coarse grains, pulses, and various oilseeds, and is supposed to defend these prices by making purchases after harvest. Over the past, MSP levels for grains have also been raised more than for oilseeds since the mid-1990s. In addition, although the government had regularly supported wheat and rice MSPs, mainly in several important cereal-producing states, price support operations for oilseeds have usually not been funded. As a result, increasingly favourable returns to wheat and rice have drawn area away from oilseeds, lowering oilseed production.

2. Fragmented and Inefficient Oilseed Processing Sector The ability of Indias oilseed sector to compete with vegetable oil imports is further hampered by a processing/crushing sector that is fragmented, small-scale, and suffers from low capacity utilization. A more integrated and efficient (lower cost) processing sector, combined with infrastructure improvements, could allow crushers/processors to pay oilseed farmers higher prices and boost production. But, two factors limit the ability of Indian crushers/processors to achieve economies of scale and improve capacity utilization: First, Indias small-scale industry (SSI) reservation policies confine processing of traditional oilseeds, such as peanuts, rapeseed, sesame, and safflower - but not soybean and sunflower - to small firms, thus allocating a large share of edible oil production to relatively inefficient processors. Second, low oilseed yields, poor transport and handling infrastructure and variability in oilseed production - as well as inaccessibility to imported oilseeds (India is one of the few countries in which the duty on import of oilseed is more than the duty on import of crude/refined edible oil) - make it difficult for processors to procure regular supplies throughout the year, resulting in low capacity utilization. Also eroding efficiency in the Indian crushing/processing sector is the chronic underuse of capacity all along the processing chainghanis, small-scale expellers, as well as the crushers and solvent extractors/refiners. Ghanis and small-scale expellers usually operate at just 10-30 percent of capacity, and even the more modern solvent extractors use less than 40 percent of capacity on average, compared with rates of 80-90 percent in the United States. According to World Bank estimates, low capacity utilization for solvent extractors has resulted in soybean processing costs in India that are 40 percent higher than in China and 90 percent greater than in the United States. The table below shoes the status of the Indian vegetable oil industry. Status of the Vegetable Oil Industry (As on January 2009) Type of Vegetable Oil No. Of Annual Capacity Average Capacity Industry Units (Lakh MT) Utilisation 1,50,000 425 Oilseed Crushing Units 10-30% (Approx) (In terms of Seeds) 419 34% Solvent Extraction Units 795 (In terms of Oil-bearing Material) Refineries attached with 51 127 45% Vanaspati Units (in terms of oil) Refineries attached with 37 226 29% Solvent Units (in terms of oil) 35 Independent Refineries 590 36% (in terms of oil) 123 Total Refineries 943 37% (in terms of oil)

Vanaspati Units

268

58 (in terms of Vanaspati, Bakery Shortening & Margarine)

19%

Source: http://www.seaofindia.com/, The Solvent Extractors' Association of India website The low capacity utilization of the different units highlights the inefficiency of the Indian oilseed processing and oil refining sector. Looking at the inefficiency of the edible oil processing industry in India, it is safe to assume that edible oil imports would be a major component to edible oil consumption in India. 2.1.4 Role of Trade Policies Import policies have played a key role in determining the overall level and type of Indias edible oil imports for decades. Indian govt. has been continuously slashing the duty on import of edible oils since the trade liberalisation of 1994. On March 18, 2009, the Government reduced the rate of Customs duty on imported crude vegetable oil to zero and on refined oil to 7.5 per cent. The table below shows the existing tariffs on different types of edible oils. Present import duty structure on edible oils is as under: Current rates of duty on Item Description WTO Binding Crude Edible Oils Soybean Oil 45% Nil Palmolein 300% Nil Palm Oil 300% Nil Groundnut Oil 300% Nil Sunflower Oil 300% Nil Safflower Oil 300% Nil Coconut Oil 300% Nil Rapeseed/Mustard Oil 75% Nil

Current rates of duty on Refined Edible Oils 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5%

So, overall the existing import tariffs on edible oils are in favour of importing of both crude and refined edible oils. 2.1.5 Consumption Shifts towards Imported Palm and Soybean Oils Consumption trends in India are marked not just by rising overall consumption, but by changing patterns of consumption as well. Reflecting traditional patterns of domestic oilseed production, for example, almost all vegetable oil consumed in India in the early 1970s was peanut oil (53 percent of consumption in 1972/73-1974/75), rapeseed oil (25 percent), and cottonseed oil (9 percent). Palm, soybean, and sunflower oil together accounted for less than 4 percent of the total. More recently, though, palm and soybean oils have become the leading edible oils consumed. The strong growth of palm and soybean oil imports and their rising share in consumption largely reflects the sensitivity of Indian consumers to price changes. The table below shows the import of different varieties of crude and edible oil.

Composition of India's edible oil imports (Units in metric tonnes) Oil Year (Nov. - Oct.) Palm Soybean Sunflower Coconut Others 2004-2005 3011550 2026748 5018 7291 0 2005-2006 2568816 1723817 100843 22307 0 2006-2007 3172479 1334040 195245 12996 0 2007-2008 4809471 7,59,433 26490 13016 0 2008-2009 6535448 989613 590175 16693 51431 Nov.2009Feb. 2010 2398509 380993 175337 4198 13950

Source: http://www.seaofindia.com/, The Solvent Extractors' Association of India website Others include cottonseed, rapeseed oil, etc The above data clearly shows that Palm Oil, Soybean oil and Sunflower oil have been the edible oil varieties that have been imported in India. So, a lucrative business opportunity lies only in the import of these three edible oil varieties.

2.2 Domestic and Import Sources

We will consider the domestic sources and import of the three varieties of edible oil: 1. Palm Oil India holds a very small share of palm oil production in the world figures. It hardly contributes to the world production and is not able to satisfy its domestic consumption demand. It produces a mere 70000 tons of palm oil annually i.e. just 0.2% share in the total worlds produce. The state having the maximum production of palm oil in India is Kerala as it produces 20000 tons per year. Kerala, cultivating oil palm trees on around 12000 hectares of land, also hold the maximum acreage with 10000 hectares pertaining to a public sector enterprise namely Oil Palms India Ltd and the rest 7

pertaining to the private sector. Godrej is the maximum oil palm plantation company in India producing over 20000 tons per year. India has been looking forward to increase its production a bit more to push it up to 3 lakh tons in the year 2015 to 2020. RBD (Refined, Bleached & Deodorized) Palmolein and Palm oil are used as cooking and frying oils. India is the largest importer of Palm oil in the world. To meet the demands of Palm based cooking oils, which cannot be satisfied with the inadequate domestic supply, India imports Crude Palm Oil (CPO), Crude Palmolein, Crude Palm Kern Oil (CPKO), RBD Palm Oil and RBD Palmolein. India mainly imports Palm Oil from Malaysia and Indonesia due to the low freight costs, shipping time advantages as well as ability to import in smaller, more frequent shipments. RBD Palmolein and RBD Palm oil imported needs no processing at all and is straight away packaged and marketed. There is a 7.5% import duty on old tariffs of 426 US $/tonne and 434 US $/tonne respectively on RBD Palm oil and RBD Palmolein. Since the landed cost of imported RBD Palmolein and RBD Palm Oil has shot up to around $835-850 a tonne, the effective duty works out to only about 4 per cent. As the difference between imported RDB Palmolein and CPO is only around Rs 3,400-3,500 a tonne, it is more competitive for many traders to directly import the refined oil and save on refining cost. So, the trend now is shift of import from CPO to RBD Palmolein. The graph below shows the import of different types of Palm oil (CPO, CPKO, Crude Palm oil, RBD Palmolein) to meet the gap between demand and domestic supply of palm based edible oils. Import of different types of Palm oil (Units in tones) 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2360573 32558 186684 422735 2372681 26840 55804 113491 2994225 9672 53440 115142 40,44,063 26264 8350 730794 5187063 107622 745 1240018

Oil Marketing Year (Nov. - Oct.) CPO CPKO Crude Olein RBD Palmolein

Nov. 2009 Feb. 2010 2139441 60660 3438 608523

2. Soybean Oil India is a net importer of soybean oil and imports it from Brazil and Argentina. Soybean oil is the second highest imported edible oil in India after Palm oil. India imports only crude soybean oil and not refined soybean oil. In India, traders are prohibited from importing crude edible oil, so only refining units can import soybean oil, which is then refined, packaged and marketed. The table below shows the domestic production and import of soybean oil in India. 2004-05 Import Domestic Production 2026748 1570052 2005-06 1723817 1708245 2006-07 1334040 1521702 2007-08 759433 1618114 2008-09 989613 1389194 Nov. 2009 Feb. 2010 380993 -

As the graph indicate, the imports of soybean oil have been falling over the recent past years. This is because the increased popularity of palm oil as cooking medium compared to the soybean oil. The popularity maybe because of the preference of importers to import Palm oil over soybean oil and also becuase of the lower cost of Palm oil. Palm oil is usually the lowest priced edible oil in international markets and has had a consistent price advantage over other imported oils in India. Indian consumers are most price sensitive and price is the most important factor in making a purchasing decision for majority of the consumers. This explains the increasing popularity and hence imports of Palm oil over soybean oil. 3. Sunflower Oil Indian sunflower seed production ranges between 10-15 lakh tons. The major producers are Karnataka (35%), Andhra Pradesh (30%), Maharashtra (15%), Punjab (4%) and Haryana (4%). The production highly fluctuates between years, depending on the monsoon. India imports crude sunflower oil but the imports are much less than Palm oil and soybean oil. India imports sunflower oil mainly from Ukraine. The table below shows the domestic production and import of sunflower oil in India. 2004-05 Import Domestic Production 5018 80811 2005-06
100843

2006-07 195245 146858

2007-08 26490 109915

2008-09 590175 117729

116790

Nov. 2009 Feb. 2010 175337 -

10

3. Business Models
3.1 Trading of imported edible oils
In this business models, traders import refined edible oil such as RBD Palmolein and then sell it to small firms which then package and market the refined oils. In India, traders are prohibited from importing crude oil such as CPO, crude sunflower oil, etc as only refining units are allowed to import crude oil by law. To import the refined edible oils, traders enter into legal contracts with foreign suppliers (i.e. exporters) of edible oils. For Palm oil the foreign suppliers are from Malaysia or Indonesia, for sunflower oil the suppliers are from Ukraine and for soybean oil the suppliers are from Argentina and Brazil. The contract, dealings, negotiations and all legal work is done through a brokerage. In India, all the deals between the traders and suppliers are done through brokerages because they guarantee that there will be no defaults by the supplier (there is no scope for the trader to default in making a payment as the payment is made upfront). The brokers have been in this business for a long time and have developed a relationship with the suppliers and the traders. So, if the supplier defaults in making a delivery then the brokers ensure that everyone in this business knows about this so that it becomes very difficult for the defaulting party. The steps involved in this business model are 1. The dealings in this business model take place over the phone. When traders need to import edible oil, they contact the brokers over the phone and quote a price. The brokers then contact the suppliers to solicit their offer prices. The brokers then look up the prices of different edible oil varieties on the website commoditiescontrol.com. This is done to ensure that the prices quoted by the suppliers or the traders are not much out of line with the prices quoting in the commodities market. Then the brokers negotiate between the suppliers and the traders to reach a price agreement. There is usually only a marginal spread between the offer prices quoted by the suppliers and bid prices quoted by the traders. 2. The trader then has to get a Letter of Credit (LC) from a bank, which will guarantee the payment, before entering into a contract with the supplier. For import transactions, a foreign LC is required and the trader needs to pay an initial fee for the LC. The bank usually requires the trader to provide some collateral in order to issue an LC. The LC guarantees a credit for a specified amount over a certain period of time. However, the bank does not extend credit for meeting any daily working capital requirements of the trader. 3. The broker then gets the signature of the trader and supplier on a contract for the delivery. The supplier bears the shipping and freight charges for the delivery. Also, if there is an export duty on exporting of oil as in Malaysia then it is paid by the supplier. The trader bears the carrying cost which is usually in the range of Rs 800/tonne and includes the initial fees paid for getting an LC issued by the bank, the fees paid to surveyor to certify the cargo of edible oil received on the destination port and any lease payments for the shore tanks (if the traders dont own shore tanks) in which the edible oil is stored. 4. The cargo of edible oil has to be certified by surveyors both on the source and destination port. The surveyors verify the quality and quantity of the oil cargo and issue a certificate. The surveyors are usually from big players like Wilmar, etc. The suppliers contact surveyors to 11

inspect the cargo on the source port. The surveyor goes to the ship and inspects the quality, quantity, etc of the oil and issue a certificate. On the destination port, the brokers also pay a surveyor to inspect the cargo received. 5. When the shipping vessel reaches the destination, it is stationed at an out port until it receives a berth on the port. When the vessel comes to the berth, pipelines are attached to the ship to move the oil to shore tanks belonging to the traders on the port. 6. The traders sell this edible oil stored in shore tanks to small (mostly local) players involved in refining, packaging, distribution and marketing of edible oil buy the oil from these importers. Again, all the dealings between the importers and the local players are done through brokerages. The brokers receive the bid and offer prices from the firms and traders respectively, reach an agreement on the transaction price, frame a legal contract between the parties and then oversee the delivery of edible oil from the shore tanks to the plants/packaging units of the firms. The delivery is done by trucks which are filled with oil from the ports and deliver to the plants. 7. These small oil marketing firms have a low requirement of 50-60 tonnes per month and thus cannot import the oil themselves and need to buy it from the traders. The traders usually import in the range of 2000 to 5000 tonnes every month and then sell it to these firms. 8. The traders do not directly brand and market the imported refined edible oil themselves as they don't have the requisite infrastructure other than just the shore tanks to store oil. To enter into marketing of edible oil, plants are needed to package oil, also proper distribution channels have to be in place and considerable investments in advertising and promotion have to be made. Moreover, there is tough competition both from big firms such as Adani Wilmar, Marico, Ruchi Soya, etc which market national level brands such as Fortune, Saffola, etc and also from regional/local players which sell refined oils either in tin cans or small packs at a cheaper price than well known brands. A majority of the Indian consumers are in the lower income segment and mostly buy small packs of oil or loose refined oil from retail outlets in which retailers sell loose from the tin packs. The big firms as well as the local players have been in the business for long, have proper distribution channels and relationship with retailers in place. So, the importers are just into importing of edible oil and do not market oil themselves. The number of oil exporters is limited as oil suppliers are big players like Wilmar group. The following is a list of suppliers for RBD Olein & CPO, crude sunflower oil and crude soybean oil: RBD Olein & CPO: Inter-Continental Oils and Fats, ICOF Global Advance Sime Darby Wilmar group Crude Sunflower Oil: Bunga Concordia 12

Glencore Wilmar Cargill

Crude Soybean oil: Cargill Concordia Glencore 3.1.1. Competition There are a large number of traders operating in trading of edible oil. The competition is intense and margins are very narrow in the edible oil trading business. Most of the importers import around 5000-6000 tonnes of oil every month. The following are some of the characteristics of edible oil trading business described above: 1. Large number of traders into importing of edible oil so the competition is intense. 2. Supply is much more than demand. Recently, huge volumes of oils have also been stacked up so the supply is abundant. 3. Margin earned by traders is negligible. In fact, in several months it may even be zero or negative. So, the overall profits can only be calculated over a year. Trading in edible oil is a volume business and not a margin business. To enter this business, Sterling Agro can start with importing around 5000-6000 tonnes every month and then sell it to local players. With time, it will gain expertise in this business and then it can increase the volumes of imports or enter into other business models like marketing of edible oil brands.

3.2 Marketing of branded edible oils

Another business model Sterling Agro can consider is marketing of refined edible brands. India is one of the most attractive consumer markets with a billion plus opportunity. Younger demographics, rising income levels and increased health awareness among both urban and rural consumers is helping drive consumption. Edible oil is part of the staple cooking of every Indian kitchen, thus recession proof. Also there is a marked shift in consumer preference from unbranded to branded edible oil due to the guarantee of purity, health and non-adulteration, so the growth opportunity for branded edible oil is incredible. A phenomenon witnessed in the recent years has been the sharp rise in the per capita consumption of branded edible oils for the Indian consumer. Also there is a significant increase in the buying power of Tier II, Tier III and rural markets due to improved purchasing power of the local population, which comprises of government and semi-government employees, and people with agri-income or local employment. In the recent slowdown, consumer companies like retail, insurance, automobile, etc. have focused growth in these areas, generating local employment, business opportunities and localised improvement of lifestyle and living. This phenomenon had a direct impact on staple food like edible oils. Another major consideration for entering into branded edible oil business is that only refining units can import crude sunflower and soybean oil. So, considering these factors, marketing of edible oil brands is a lucrative business opportunity. 13

Some big players like Adani Wilmar, Ruchi Soya and Marico own national level brands such as Fortune, Nutrela, Saffola, etc. Apart from the big players, there are numerous small firms which market regional brands of edible oil. Also many firms are entering the branded edible oil
segment, so margins will be lower during the entry phase due to the associated sales and marketing expenses. Some of the local refineries, which market sunflower oil brands, buying

imported crude sunflower oil from traders are: 1. Gold Winner Sunflower oil, Kaleswari Refinery Pvt. Ltd. 2. Supreme Sunflower oil, S.S.D. Oil Mills Company Ltd. 3. K.T.V. Oil Mills 4. SVS Oil Mills Some of the local refineries, which market soybean oil brands, buying imported crude soybean oil from traders are: 1. Ambika Refinery 2. Maheshwari Blend Industries Ltd. 3. Krish Refineries Ltd. 4. Jindal Oil & Fats Limited 3.2.1 Challenges in marketing of branded edible oil Marketing of brands takes a lot of expertise in advertising, promotion and setting up of effective distribution channels. Moreover, there is intense competition both from regional players which sell local brands in tin packs (which are then sold loose by retailers) or in small packs and also from national level brands. Marketing of branded oil needs investments in advertising and promotion, distribution and logistics expenses. Moreover, profitable margins have to be offered to retailers to ensure that the firm's brands are pushed by retailers. So, competing with established brands will required considerable expertise in marketing and positioning of brands and also knowledge of setting up and managing an effective supply chain network to ensure that the firms brands are available in the SKUs (Stock Keeping Units) as demanded by the customer at the right place and right time. If the brand is off shelf or not available in the SKU as demanded by the customer, then the customer will switch to other available brands. So, the firm has to ensure that its edible oil brands are available in retail outlets in the proper SKUs. 3.2.2 Distribution Network Distribution and reach are critical to ensure products reach the consumers. For sustaining national level edible oil brands, it is critical to create a pan-India distribution and retail network both in cities and in the interior heartlands through a combination of sales agents, distributors and local retailers. The supply chain of products in the edible oil market in India is one of the longest supply chains an industry could have. There are as many as 5 levels of intermediaries involved in the entire supply chain through which a product passes before reaching the end consumer. Firms face a major challenge of making their edible oil products available in the market in the right quantities and in the right time. To do this effectively, a company should have a wide network of sales agents and distributors, wholesalers and retailer whose margins on these products actually double the price of these products when a final consumer buys it. The margins kept by these intermediaries range from 2% to 5%. 14

The products in this industry are transported from manufacturing units via warehouses to distributors who further sell the same to wholesalers or stockiest who finally sell it to the retailers in the market. These products are transported either via roadways or railways within the domestic markets and normally dont take more than a week to reach the retailers. Edible oil products are normally a high volume business and products have to essentially be available in the market at all given points of time and at all given points of purchase and therefore the distribution activities are highly volatile and dynamic. The supply of products takes place virtually on a daily basis in fixed quotas or otherwise, to retailers as per their requisitions and the anticipation of demand and the performance of products in the recent past. All such criteria are taken into consideration before the quantum of products being dispatched to the next level of intermediary. Since its a volume game, manufacturers make all possible efforts to boost sales and promote their distributors to earn more and more orders from the retailers and wholesalers. A close check is maintained on the flow of the products on a daily, weekly, fortnightly and monthly basis to determine the trend in the business and flow of products and consumption. This activity also helps to find out drawbacks of the distribution system, if any, and rectify them within time. 3.2.3 Competition Some of the major competitors in branded edible oil business are: Adani Wilmar Adani Wilmar owns the Fortune brand of cooking oil, which is the single largest brand of edible oil in India. Ruchi Soya Ruchi Soya owns several edible oil brands out of which Nutrela and Ruchi No. 1 Vanaspati are the biggest. Nutrela is the largest selling Soya foods brand in the country, with more than 50% market share. Nutrela and Ruchi No. 1 vanaspati are regional leaders in their respective categories. Marico Marico owns the brand Saffola which is the most popular brand in the health conscious segment. It also owns another brand called Sweekar but it is less popular than Saffola.

3.3 Joint Venture with foreign supplier

If Sterling Agro considers venturing into marketing of edible oil brands, then it should also consider forming a JV with a foreign supplier which may have its own plantations abroad. By doing this, it can take advantages of backward integration in the supply chain. For example, Adani has entered into a JV with Wilmar group which owns several plantations. By doing this, it has ensured a constant and reliable source of edible oil supply. As the monthly edible oil input requirement for a big player like Adani Wilmar is considerable and also keeps fluctuating with demand, it is usually profitable to enter into a JV with a foreign supplier rather than depending on traders for the oil supply. Some of the major advantages of backward integration are: 1. Assurance of the pricing, quality and availability of supplies, and efficiencies gained from coordinating production of supplies with their consumption. 15

2. Generates cost savings if volume needed is big enough (as in the case of well established big brands of edible oils) to capture efficiencies of suppliers. 3. Improved supply chain coordination as the supplier is now part of the business. So, business data such as planned line extension, penetration into new markets, new product launches, etc,, demand and sales forecast and other internal information can be shared with it to gain supply chain surplus without fear of leaking confidential information. 4. Allows a firm to differentiate its products by means of more control over inputs and also customization of inputs. 5. Helps to capture upstream profit margins and also increase entry barriers for new competitors provided the JV results in some unique advantage such as access to a scarce resource.

3.4 Taking positions on future edible oil prices in commodity and spot markets
In this model, the oil is kept in shore tanks on the port in an anticipation of a future price rise. The purpose is to sell the oil in the commodities spot market in event of a price rise. The firm can also enter into future derivates on edible oils on a futures exchange like NCDEX or MCX to speculate and profit from the rise in prices. Speculating on the future price rise requires lot of expertise in commodity trading and knowledge of forecasting prices by analysing different macroeconomic and market factors. Also, there is a huge risk if the speculation turns wrong and there is an adverse movement in the prices. In India, the business model in which oil is kept in the shore tanks over some time period to take a position in the spot or futures market does not exist at present. This is because of the following factors: 1. The carrying cost of oil is high as mostly the shore tanks are leased by the importers. 2. The price volatility in India is very high so holding the oil exposes the firm to price risks. 3. The payment to the supplier has to be made upfront so the trader makes a huge initial investment in procuring the oil inventory. The traders like to liquidate this position as soon as possible rather than holding onto the inventory. There is a possibility that the supplier would agree to receive the payment after a period of 90 to 120 days from the date of delivery. This frees up the trader from making the substantial initial investment. But in this case, the trader would be exposed to exchange rate risk as the supplier has to be paid in foreign currency. So, if the foreign currency appreciates then the trader stands to lose from the unfavourable change in the forex rate. Also, even in this scenario, the trader has to still bear the carrying costs and also the exposure to price volatility in the domestic markets.

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4. Cost Structure
In the trading business model, the cost factors are limited and consist of the following: 1. Import Price The trader has to pay the negotiated price for the import of the edible oil to the supplier. The negotiated price is very close to the spot prices of edible oil in the international markets. The foreign exchange rate is a major factor influencing the amount a trader pays in domestic currency, i.e. the rupee. An appreciation of the foreign currency (mostly payments are made in dollar) against rupee means that the trader will have to pay more even if there is no significant rise in edible oil prices. 2. Carrying cost The trader has to pay for the carrying cost of edible oil. This includes the initial fee that the trader pays to the bank to get an LC issued, any lease payments for shore tanks and the fees paid to the survey to certify the received cargo on the ship. This is usually of the tune of 700-800 Rs/tonne. In the business of marketing edible oil brands, there are number of additional cost overheads related to advertising and promotion of the brands, distribution and logistics expenses in delivering the products to the retailers, providing considerable margins to retailers to push the products and also in employing marketing and sales teams.

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5. Factors influencing domestic Edible oil prices

The demand and supply is the main driving force behind prices of edible oils. If the domestic production falls in a particular year, as in 2008-09, then imports have to be increased to meet the rising demand. The following factors influence the domestic prices: 1. Effect of Foreign Exchange Fluctuation on Domestic Edible Oil Prices The foreign exchange rate plays a major role in determining the prices of edible oil. The recent wide fluctuations in foreign exchange rate meant that there was a high volatility in the prices of imported edible oil varieties. An appreciation of the dollar against the rupee leads to higher price in Rs of oil imports even though the international prices in US $ may not have increased at all. 2. Local Supply of edible oil The domestic supply of edible oil plays a major role in determining the amount of imports and also the domestic prices of edible oil. If the domestic production is much less than the consumption demand, then the prices rise sharply and imports are need to meet the gap in demand and stabilize prices. For example, inadequate domestic production in 2008-09 caused edible oil prices to rise sharply. The govt. then slashed the import duty on edible oil to increase the imports and reduce the delivered price of import oil. This was done to meet the rising demand and also stabilize the prices of edible oils. Thus, factors such as weather, rainfall, etc which affect domestic oilseed harvests and thus oil production are important factors in deciding edible oil prices. Also, there is seasonality in both demand and production of edible oil varieties. Indias seasonal crop pattern causes most of the oilseeds to be harvested in September-November and supplies being most abundant in the fall and winter. So, prices and imports are typically the lowest in these months. Conversely, domestic supplies tend to become tighter in the second and third quarter of each calendar year. The effect of this seasonal pattern of production is that India imports more in the second and third quarters. Also, prices tend to be higher in these quarters. This is evident in the domestic edible oil price data in the tables above. 3. Trade Policies Indias import policies play a major role in determining the cost of imported oil. Recently, the import duties have been slashed drastically to allow imports of edible oils at low duties. However, any future variation in the import policies can affect the prices of edible oils.

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6. Business Plan 2010-2015

6.1 Business Directions
The following is a series of steps Sterling Agro can pursue: 1. Do trading operations by importing palm oil for the current year. 2. After gaining experience in trading, go for a JV partner in Indonesia or Malaysia. 3. Invest in ready plantations in Malaysia, Indonesia and Ghana. 4. Lease out or set up refinery in India. 5. Enter strategically into other edible oils. 6. Develop brands and products by developing downstream supply chain

6.2 Projections
YEAR I 10000 60000 23400 468 1170 1638 YEAR II 35000 420000 163800 3276 8190 11466 YEAR III 100000 1200000 468000 9360 23400 32760

QUANTITY MT / Month Total Annual Quantity At Current Prices (RS Lac) Margin at 2% Margin at 5% Margin at 7%

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