LT FOODS LTD. A promising basmati story, available at a bargain.
Dec 14, 2019. LT FOODS Ltd, current market price Rs.23 a share.
Dear Readers,
It looks like Basmati has become affordable once again.
Investors who had invested in listed Basmati stocks made staggering returns of over a 1000% between early 2014 & late 2017! That is, 10 times returns on their initial investment in a little under 4 years.
Wise investors made timely exits by booking profits. They realised that basmati stocks had become highly overpriced towards the end of their bull run (As the famous Charlie Munger once said “No matter how wonderful a business is, it is not worth an infinite price").
Early last year (2018), while the small and midcap stock indices were seemingly in free fall, all stocks including Basmati stocks had a tough time maintaining their market capitalisations. US sanctions on Iran, one of India’s largest importer of Basmati rice (https://bit.ly/2soqZx1) and Europe & Saudi Arabia’s tightened pesticide norms for basmati rice imports (https://bit.ly/2VMMnYL) proved to be major setbacks for this sector.
This resulted in a large drop in the share price of India’s biggest listed Basmati rice companies, LT Foods Limited & KRBL Limited (better known for their flagship brand ‘Dawaat’ & 'India Gate')
The stocks currently trade at Rs.23 (LT foods) & Rs.205 (KRBL ltd) a share.
While the economic climate has been tough on Basmati rice producers, these stocks have displayed great resiliency in their fundamentals and steadfastness in their vision for growth.
We have reasons to believe that investors have once again been presented with an opportunity to buy them at more than reasonable bargains.
So, what makes Basmati interesting to a fund manager ?
As fund managers, we constantly look for an ‘economic moat’ in the businesses we choose to invest in.
An economic moat in simple words is a long standing competitive advantage that lets a business earn outsized profits and protect its profit margins from erosion by other competitors.
A technological patent, a well established brand are examples of an economic moat.
It is a unique advantage that cannot be easily replicated.
In the case of Basmati rice, the moat is geographic. Basmati only grows in the plains of India and Pakistan, with India accounting for 70% of its total production. This eliminates the possibility of cheap Basmati supplies from other countries, though many (Indonesia, Nepal, China etc.) have tried growing it with little success. India alone exports roughly INR 30,000 crores of Basmati rice globally every year. With a growing palate for premium Basmati rice over regular rice the market share of Basmati is growing steadily.
Basmati often called ‘the King of Rice’ commands a premium of 80-90% over the price of non-basmati rice. It is a long grained rice characteristically distinct in terms of flavour, aroma, size and fluffiness. Broadly Basmati can be categorised into 3 categories: PUSA1121 – sweet taste, high volume, distinct aroma, PUSA1 – High yielding variety, Traditional Basmati –HBC19, CSR30, 370 etc. PUSA, the name given after PUSA institute in New Delhi where the varieties were first developed. The Discovery channel shot a brilliant documentary called “The God of Grains” which outlines the farm to plate journey of Basmati Rice (https://bit.ly/2OzDNcD).
Globally, 495 million metric tonnes of milled rice was produced in FY18-19, making rice the third most produced crop after corn and wheat. India is the second largest producer of rice in the world after China with a production of 112 million metric tonnes per annum.
The market share of Basmati rice is a mere 2.5-3% of the total rice produced in the world and roughly 7-8% of the total rice produced in India, implying it has ample room to grow both globally & domestically.
India exports about 12 million metric tonnes of rice out of which Basmati rice constitutes to 4.4 million metric tonnes by volume and approximately INR 32,000 crores by value. Basmati exports from India have grown at a CAGR of 6% since FY15-16 as against a 1% increase in the global consumption of rice each year.
The rice industry in India is quite competitive with many local & regional players selling unbranded rice. To counter this larger companies like LT Foods Ltd. & KRBL Ltd have started promoting their branded basmati rice to establish customer loyalty and set a benchmark in terms of rice quality.
This has risen the aspirational demand for branded basmati rice amongst Indian & Foreign households with rising disposable incomes.
As of FY18 the market share of branded basmati rice in India is at 30% of the total basmati rice market; up from 17% in FY12.
Originally viewed as commodity stocks, LT Foods & KRBL Ltd are slowly changing their perception to a branded FMCG company capable of commanding premium valuations in the stock market.
In this report we look deeper into LT Foods Ltd one of the front runners in India’s Basmati Rice story.
LT Foods Ltd is the second largest player in the branded basmati rice segment in India with a market share of roughly 30% for its flagship brand Daawat.
The company was established in Amritsar in 1978 by Mr.Vijay Kumar Arora.
40 years since, LT Foods Ltd has grown into a company with a turnover touching 4,000 crores exporting basmati rice to over 60 countries in addition to feeding the domestic population.
LT Foods’ brand ‘Royal’ has the largest market share (of roughly 40%) in the US Market making it the largest branded basmati player on the American subcontinent.
The company has 5 plants located in Sonepat, Bhopal, Amritsar, Varpal with a combined milling capacity of 110 metric tonnes per hour. Some prominent brands of the company which a reader may quickly recognise include Dawaat, Royal, Ecolife, Rozzana, Indus Valley, Devaaya etc.
On the financial front the company has displayed a steady top line growth of 7.5% CAGR despite the significant headwinds discussed earlier, and an impressive PAT growth of 14% CAGR per annum for the last five years.
LTFL’s revenue is geographically well diversified with the Indian market contributing 45%, the American market 28%, the middle eastern market 12% and 15% from rest of the world.
More importantly LT Foods Ltd. has consciously deleveraged its balance sheet by bringing down its debt to equity to 1:1 in FY1819 from roughly 3:1 in FY1415. The company in its communication with investors has committed to further bringing down its debt in the forth coming years. The stock currently trades at a surprisingly low 0.6 times its book.
[Figures in Crores INR]
Future Outlook & Growth
On the growth front, LTFL recently set up a rice processing plant of 60,000 MT in Rotterdam to tap the European market. In FY17, it acquired "Gold Seal Indus Valley" and "Rozzana" brands from Hindustan Unilever Limited in order to strengthen its footprint in the lucrative Middle Eastern markets.
The Organic food segment part of Nature Bio-Foods Ltd. (a wholly owned subsidiary of LTFL) with its brand Eco Life is the fastest growing segment for the company, it registered a CAGR of 44% over FY12-17.
LTFL's value added product division accounts for 9% of the overall business. This is a high margin business that is expected to boost the company's profitability in the future.
Some of the Value added products include fast cooking brown rice, sauté sauces, and a variety of rice based snacks taking the company further up the value chain.
LTFL has also entered into a joint venture with Kameda Seika (a leading Japanese snack company) to manufacture rice-based snacks.
On the branding and marketing front LTFL has been actively engaging celebrities like Amitabh Bachchan and Chef Sanjeev Kapoor to endorse its products.
LTFL has access to 1,50,000 traditional retail outlets and 800 distributors reaching 93% of the towns with 2lakh+ population in India.
Recently it has also acquired the brand 817 Elephant from Deva Singh Sham Singh which is expected to help the company strengthen its footprint in Canada & Australia.
In Dec'17, LTFL successfully raised INR 400 crores via Qualified Institutional Placement with an aim of deleveraging its balance sheet and investing in further expansion of the company.
While LT foods (Daawat) may still seem behind its No.1 peer KRBL (India Gate) in some respects such as indebtedness, profit margins, net worth, brand awareness etc. The fact that the 40 year old company has grown at an accelerated pace to have become comparable to KRBL’s 100 plus year legacy in India is respectable.
We like LT food’s present valuation and its aggressive five-year growth road map ahead. We are eager to see how the management measures up on the same.
SEBI Disclosure: This report is not a recommendation to buy or sell any stocks. Investors are requested to conduct independent research or consult their Registered Investment Advisors for advice. Prosperity Wealth Management will not accept any liability for any investment decisions made based on this report. The company’s opinions may be biased by its holdings in these stocks. Further, Prosperity Wealth Management may hold or sell these stocks at its discretion at anytime without prior notice to investors. Prosperity Wealth Management does not guarantee the accuracy of any information provided herein. Copyright 2020.