A packet of Basmati rice or 10 Shares of this Basmati stock ?
Updated: Dec 14, 2019
It looks like Basmati has become affordable once again.
Investors who had invested in listed Basmati stocks made handsome returns of over a 1000% between early 2014 & late 2017.
Smart investors made timely exits realising that basmati stocks had become highly over priced towards the end of their bull cycle (As the famous Charlie Munger says “No matter how wonderful a business is, it’s not worth an infinite price".)
Early last year, in line with the bearish sentiments that engulfed the entire small and midcap space in the Indian stock markets, Basmati stocks too witnessed a fair share of decline in their prices.
They fell further after the US imposed sanctions on Iran, one of India’s largest importer of Basmati (https://bit.ly/2soqZx1). To add to their woes Europe and Saudi Arabia tightened their pesticide regulations for rice leading to a drop in their acceptance.
As a result, the shares of India’s largest and only listed companies in the Basmati space, LT Foods Limited (better known for its flagship brand ‘Dawaat’ ) and KRBL Limited (better known for its flagship brand ‘India Gate’) trade currently at Rs.23 & Rs.205 a share, a discount of 70% from their once upon a time highs.
While nothing has fundamentally changed with these companies except that they have grown at an impressive pace, we have reasons to believe that investors have once again been presented with an opportunity to buy these stocks at more than reasonable bargains.
For those who do not know what Basmati is- it is a type of premium long grained rice characteristically distinct & well defined in terms of aroma, taste, length and fluffiness. Often called ‘the King of Rice’ basmati commands a premium of about 80-90% over non-basmati rice. What makes it even more attractive for investors is the fact that it only grows in the plains of India and Pakistan with India accounting for 70% of its total production. This offers a natural hedge against the possibility of cheap supplies from other countries.
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.
Of the above, The market share of Basmati rice is a meagre 2.5-3% of the total rice produced in the world and roughly 7-8% of the total rice produced in India, Implying Basmati rice 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 which is 60% of the total value of all rice exports. Basmati exports from India have grown at a CAGR of 6% since FY15-16 as agains 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, the perception we believe will change in the future where they will be viewed as branded FMCG stocks commanding significantly higher valuations than what they command in the market right now.
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 later LT Foods Ltd has grown into a company with a turnover touching 4,000 crores exporting basmati rice to 60 countries in addition to feeding the domestic population. LTFL’s brand ‘Royal’ has a major share of 40% in the US Market making it the largest branded basmati player on the American subcontinent. LT foods limited has 5 plants in Sonepat, Bhopal, Amritsar, Varpal with a combined milling capacity of 110 metric tonnes per hour. The company’s prominent brands include Dawaat, Royal, Ecolife, Rozzana, Seal Indus Valley, Devaaya, Heritage, 817 Elephant.
On the financial front the company has displayed a steady top line growth of 7.5% CAGR (understandably not too high as the company operates in the rice industry and given the recent challenges in the exports of basmati rice for Indian producers) and an impressive PAT growth of 14% CAGR per annum over the last five years. More importantly LT Foods Ltd. has drastically brought down its debt to equity ratio to 1.02 times in FY1819 from 2.91 times 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 0.66 times its book value.
[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, 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 US, Canada & Australia. More importantly, In Dec'17, LTFL 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 may still seem behind its No.1 peer KRBL 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 old legacy in India is respectable. We like LT food’s present valuation and its aggressive five-year growth road map. 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.