Modernise or perish: Rice millers have their choice cut out

CONVENTIONAL RICE MILLS tend to have weaker financial profiles compared with modern ones, a CRISIL analysis of about 300 of them from the non-basmati category shows. Such mills face difficulty in managing their business given the low operating margins, low liquidity and high working capital requirements typical of the sector.

Rice milling involves removal or separation of husk and bran from paddy to obtain the edible portion of rice. While conventional mills process paddy using steel hullers, modern mills use the more efficient rubber-roll shellers.

Further, activities such as cleaning, drying, grading and polishing involve manual operations in conventional mills, while their modern counterparts use driers, aspirators, graders, polishers and other equipment for these. The manual process of conventional units leads to higher percentage of broken rice and lower efficiency.

CRISIL’s interactions with micro, small and medium enterprises (MSMEs) which it rates in the space reveals that the conversion ratio from paddy to polished rice is more by 10 per cent for modern mills, compared to conventional mills.

Given lower yields and low capacity utilisation, the operating profit margins (OPM) of conventional mills are at least 120-400 basis points (100 basis points = one per cent) lower than that of modern mills across rice producing states. CRISIL believes this gap will only widen going forward, considering the gradual increase in labour costs.

Within the CRISIL-rated sample, conventional rice mills also have lower ratings than their counterparts due to negative cash accrual and working capital crunch resulting in delays in payments to lenders. Unless such units modernise, CRISIL believes, lenders would be wary, and some would also be forced out of business.