Rice Industry

Batlivala & Karani
SECTOR REPORT
5th March 2007
Indian Rice Industry

Greener on the other side
We expect the rice sector to grow at an increasing momentum, as food processing is gradually gaining industry status in India. This change is driven by dominance of agriculture in Indian economy which produces 22% of the total worlds rice production. The continuing improvement in logistics, development in retail and increase in the per capita income would further support the growth. As the sector gets more transparent margins will be under pressure which remains our biggest concern. The international vagaries would affect the demand-supply situation in the industry, as rice accounts for 13% of total agricultural exports from India, consisting of 22% basmati and 78% non-basmati rice. Indian rice industry is largely fragmented and hence suffers from inefficient production processes, as these players lack latest techniques and expensive machines required for rice processing. The fact that there has been no set precedence of increase in margins is yet another area of concern. Due to lack of transparency with respect to management of rice trade and rice being a commodity, the valuation of the same cannot be expected to exceed that of other commodity players.
Companies
Recom. CMP Target Price Initiating Coverage KRBL Kohinoor Foods REI Agro Not Rated LT Overseas Lakshmi Energy
*Annualised
EPS (Rs.)
EPS CAGR (%)
PER (x)
(Rs.) MP MP Sell 125 69 193
(Rs.) 154 66 145
FY06 FY07E FY08E FY09E 15.2 10.6 17.0 FY04 23.7 13.2 15.5 FY05 6.9 3.4 30.7 11.0 17.0 FY06 6.7 7.7 36.5 12.8 21.0 FY07* 20.3 16.0
FY06-09E 33.8 6.3 7.3 FY04-07* 38.7 103.4
FY06 FY07E 8.2 6.5 11.4 FY04 5.7 76.7 5.3 5.0 12.5 FY05 6.4 41.2
FY08E FY09E 4.1 6.3 11.3 3.4 5.4 9.2
FY06 FY07* 6.6 18.5 2.2 10.1
NR NR
44 161
NA NA
7.6 1.9
Rohit Anand [email protected] Tel.: +91-120-4259823
Rishab Bothra [email protected] Tel.: +91-120-4259823
B&K RESEARCH
MARCH 2007
INDEX .................................................................... No. Industry ................................................................. 3-16 Investment arguments ......................................................................... 3 Investment concerns ........................................................................... 7 Rice industry ....................................................................................... 8 Indian market ....................................................................................... 9 Basmati rice ....................................................................................... 11 Non-basmati rice ............................................................................... 14 Peer group ......................................................................................... 15 Companies ............................................................ 17-89 KRBL ........................................................................ 18 Kohinoor Foods .......................................................... 35 REI Agro .................................................................... 55 LT Overseas............................................................... 73 Lakshmi Energy and Foods .......................................... 81
INDIAN RICE INDUSTRY THEME REPORT
B&K RESEARCH
MARCH 2007
Investment arguments
Agriculture is one of the most important economic sectors of India. It contributes 19% to the GDP and nearly 65-70% of the population depends on agriculture for livelihood. India is the largest producer of sugarcane, milk, coconut, spices and cashews and the second largest producer of rice, wheat, pulses, fruits and vegetables. Rice is a low fat and high energy food. Rice Staple food On the demand side, the global rice market is about US$ 120 bn (approx. Rs. 5.4 trillion) and is expected to grow annually at an average rate of 2-3% for the next 10 years (as per United States Department of Agriculture). Rice is cultivated in 113 countries and is ranked as the third principal staple food in the world after wheat and maize. It is consumed as staple food by half of the worlds population and is considered to be the principal source of nutrition, calories as well as dietary needs. On the supply side, the total production of rice globally is around 405 mn tonnes which is obtained by processing around 634 mn tonnes of paddy cultivated on more than 150 mn hectares of land.
Dominance of rice as staple food for 50% of worlds population
Global paddy production and area

640 620 mn tons 600 580 560 540 520 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 158 156 154 152 150 148 146 144 142
Area
Source: Company (REI Agro)
Production
India Second largest producer of rice India is the second largest producer of rice in the world after China. India and China together account for about 50% of the worlds rice growing area and 56% of rice production. Approximately 22% of the total world rice production is obtained from India. This is done by processing 132 mn tonnes of paddy and accounts for nearly 1/3rd of Indias agriculture production.
India producing 22% of world total rice
mn hectares
B&K RESEARCH
MARCH 2007
World rice production (Average 1994-2004)

35 30 25 20 15 10 5 0 % of total rice production 30.7
nd 21.6 2 Largest
21.8
8.7
5.6
4.4
1.9 Japan
1.8 Brazil
1.6 US
1.2 Pakistan
0.4 EU (15 countries)
0.4 Iran Rest of the world
India
Vietnam
Source: Company
Scope for scalability Both the basmati and non-basmati sectors present the organised players with tremendous opportunities since organised players have a low presence of 35% in the share of basmati and 5% in the share of non-basmati segment. The former is a high margin export oriented segment while the latter provides the alternative of value-added products derived while processing. The fragmented players lack the technology and expertise in procurement process required for these high end activities. Hence, the large players have the scope to take up the advantage and capture the market. There are more than 139,000 rice processing mills in India processing about 132 mn tonnes of paddy. Out of this, a little over 25% (35,000) are classified as modernised rice mills. Technology: Large organised players have the accessibility to infuse the latest technology for efficient and effective production. New machinery needs substantial capital, which typically large players can afford to invest. Latest technology reduces production cost per unit and thus helps in achieving economies of scale.
Opportunities for organised business to grow
Comparative advantage with organised players
Quality: Small millers use old traditional methods to obtain rice by processing paddy. Processes like grading and sorting for size and colour, are not available to them. This affects the quality of rice produced from these mills. Effective procurement: Quality is the most important characteristic for maintaining brand recognition in the market. This requires effective procurement process for paddy. Large players can procure the bulk volume through upfront payments to farmers and middlemen.
Indonesia
Thailand
China
B&K RESEARCH
MARCH 2007
Break-up of rice industry

Non-basmati
95%
Basmati
65%
5%
35%
Unorganis ed Organis ed
Proportion
Source: B&K Research
Growing organised Indian food chain The Indian food chain lacks the adequate presence of large retailers and commodity processors at present. Now the scenario is changing with large corporate houses like ITC, Reliance and Bharti getting active in the Indian food chain following relaxation in regulatory and policy environment.
Organised retail to boost the trade further
Export potential Rice accounts for 13% of overall agricultural exports and approx 1.6% of total exports from India. India is exporting both basmati rice and non-basmati rice to various countries in the world. For the period FY00-06, exports have grown at a CAGR of 19.6%. We expect this growth rate to be maintained in exports.
Acceptance of Indian rice in the global markets
Exports and Exports as the % of production

6 5 Mn Tonnes 4 3 2 1 0 0.7 0.5 FY93 1.4 1.1 1.1 FY94 0.9 FY95 4.9 FY96 2.5 FY97 2.4 FY98 5.0 FY99 3.1 2.9 2.1 1.8 1.9 FY00 1.5 FY01 2.4 6.4 5.8 6.5 3.9 5.5 5.7 7 6 5 4 3 2 2.2 FY02 5.0 FY03 3.4 FY04 4.8 FY05 5.1 FY06 1 0 %
Total Exports
Export as the percantage of total production
Source: All India Rice Exporters Association
B&K RESEARCH
MARCH 2007 India is the largest producer and exporter of basmati rice. During FY06, 1.1 mn tonnes of basmati rice were exported for a total sum of Rs. 30.3 bn. Exports of basmati rice grew at a CAGR of 9.4% between FY00-06. India has a natural competitive edge considering that basmati can be grown only in India and Pakistan. In fact, Indian basmati rice is well recognised in the international market because of its quality. The government has formulated an aggressive export promotion policy to further develop the basmati rice by adoption of improved production technology and new high yield seeds. India is also exporting substantial quantity of non-basmati rice to various countries in the world. However, the export of non-basmati rice has been fluctuating year-to-year due to weather conditions affecting the production of non-basmati rice. The exports of non-basmati rice have grown at a CAGR of 21.7% for FY00-06.
India Largest producer and exporter of basmati rice
Export (Basmati vs. Non-basmati)

6 5 45 44 21 8 25 12 40 50 47 32 14 24 23 22 40 30 20 10 0 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 %
Level of non-basmati exports depends on production depends on weather conditions
Mn tonnes
4 3 2 1 0
Non-Bas mati Rice Bas mati Rice Proportion (Bas mati/Total Exports )
Demand projections Global rice production is expected to double from 405 mn tonnes to 800 mn tonnes by 2030 to meet the increasing demand on account of continued growth in population and increasing disposable incomes of urban areas.
Improving disposable income to further the demand
B&K RESEARCH
MARCH 2007
Investment concerns
Capital intensive While harvest and production of rice is seasonal, the sales are done throughout the year. This requires maintenance of high raw material and finished goods inventory. Therefore, there is need for large warehousing facilities. Companies require substantial working capital to make upfront cash payments at the mandis for bulk procurement and also for stocking/ageing the rice for enhancing the end product quality.
High working capital required
Turnover ratios (FY06)

Particulars Working Capital Debtors turnover ratio 3.9 5.1 8.7 Inventory turnover ratio 1.6 1.9 1.8 capital/Sales employed/Sales REI Agro KRBL Kohinoor Foods 1.1 0.8 0.7 1.5 1.0 0.9
Raw material availability Agricultural commodities like rice are largely dependent on factors such as rain water availability, irrigational facilities, insect manifestation and change in crop patterns. These factors are beyond the control of companies. Adverse changes in climatic conditions and above factors can lead to a shortage of produce resulting in lower profitability and even loss in some cases. Purchasing skill of individual companies may also have an impact on their individual purchases as a lot of renowned players are expanding their processing facilities.
Seasonal availability of paddy
Competition Due to easy entry at low capacity levels, various players from the unorganised market present stiff competition to the existing companies. An increasing numbers of players with cheap variants of rice take up the market at lower prices. Many large players are also expanding capacities which could lead to increase in competition resulting in competitive pricing.
Low entry barrier
Commodity business Processed rice is still an evolving industry in India and has a long way to go before achieving a full-fledged industry status. Rice is still sold in the market as a commodity with only a limited number of large players dealing in the organised trade. Hence, the market forces governing the product are similar to that in case of any other commodity business. The demand and supply play the most pivotal role in determining the dynamics of the business.
Rice still traded as commodity
Low margin Rice industry has low EBITDA margins of 7-8% due to high material cost component at around 80% of revenue. But the major development in the form of branding of products as any other retail product is expected to improve the margins going forward. This will be largely on account of improved realisations.
Margins dependent on level of value added
B&K RESEARCH
MARCH 2007
Rice varieties
10% 3%
Rice industry
About rice
Rice is the common name for the type Oryza (grass). From an early history in the Asian areas rice has spread and is now grown on all continents except Antarctica. Rice is high in complex carbohydrates, contains almost no fat, is cholesterol free and is low in sodium. It is a good source of vitamins, minerals and protein.
12%
Varieties of rice
75% Indica Aromatic Japonica Glutinous
Rice has nearly 140, 000 varieties grown worldwide, major being Indica, Japonica, Aromatic and Glutinous.
Treated rice
Rice is treated to impart new characteristics through various processes, whereby it gains added properties and qualities. These can be categorised as: White rice or raw milled rice: It is also known as polished rice because most of the outer layers like husk and bran are removed from the kernel, through the milling process.
Source: Company (REI)
Rice grain
Brown rice: The only difference between these two varieties is the milling; milling removes both the husk and the bran layer of the kernel. In brown rice, only the husk is removed while the bran layer remains. Through the milling process, brown rice becomes white rice. Because of the bran layer, brown rice contains more nutrients than white rice. In particular, brown rice is very high in fibre and vitamin B. Parboiled rice or sella: Parboiled rice is raw rice treated through a process wherein the ingredients and aroma of the bran are forced into the rice. It undergoes a special process of boiling and steaming to capture the nutritive value of bran in the rice. Sella rice is generally consumed in the Middle East.
Source: Coagro
Global market (US$ 120 bn i.e. Rs. 5.4 trillion)

Particulars (Mn tonnes) FY02 398.4 411.2 FY03 380.8 411.4 FY04 391.4 415.1 FY05 401.1 413.3 FY06 405.3 413.6 Production Consumption
Source: LT Overseas (Prospectus)
Demand-supply gap in global market
B&K RESEARCH
MARCH 2007
Indian market (US$ 23 bn i.e. Rs. 1 trillion)

Rice production
Basmati: Non-basmati ratio of 5:95
The rice industry in India is broadly divided into two segments i.e. basmati rice and nonbasmati rice with the total size of Rs. 1 trillion (Basmati rice Rs. 45 bn, non-basmati rice Rs. 955 bn). It is a complex industry with the presence of both the large scale as well as small scale production units. Unorganised and regional players dominate the non-basmati rice processing segment. The Indian rice market is growing at the rate of 3-4% of which the basmati rice market is growing at a rate of 6% with branded basmati is growing at 15% p.a.
Rice production India

100 80 Mn Tons 60 40 20 0 -20 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 10.2 1.9 -5.9 6.2 1.0 4.2 4.0 7.9 -5.2 -16.0 FY03 FY04 FY05 FY06 13.1 -1.1 4.7 73 80 82 77 82 83 86 89 85 92 77 87 86 90 100 80 60 40 % 20 0 -20
Production
Increas e in Production
Rice consumption
Supply-demand gap in India
Demand for food grain in low income countries like India is determined by two-basic factors viz. population growth and income level. There is good demand for both basmati and non-basmati rice. Consumption within India is almost 85 mn tonnes of the total rice processed.
Rice consumption India

86 84 82 Mn tons 80 78 76 74 72 70 FY01
Source: Foreign agricultural services
Cons umption of Rice
FY02
FY03
FY04
B&K RESEARCH
MARCH 2007
Major paddy producing regions in India

In India, paddy is grown under varying altitude and climate conditions making it the perfect country to produce the same. In eastern and southern regions of the country, the mean temperature is found favourable for rice cultivation throughout the year. Hence, two crops of rice are grown in a year in these regions. In northern and western parts of the country, where rainfall is high and winter temperature is fairly low, only one crop of rice is grown during the month from May to November. The productivity of basmati paddy in India is around 1,400-2,100 kg/hectare against the yield of non-basmati paddy of 4,500-5,000 kg/hectares.
10
B&K RESEARCH
MARCH 2007
Basmati rice
(Represented by KRBL, Kohinoor Foods, REI Agro and LT Overseas)
India and Pakistan the only basmati producing nations
It is premium rice because of its super fine kerenals, exquitite aroma, sweet taste, silky texture, linear elongation with least breadth and swelling. It is also renowned for its flavour, when cooked. It is a lifestyle product and like all other lifestyle products, the purchase decision is highly influenced by a high degree of recall value in the minds of the consumers. The gap between demand and supply will continue to widen because of the growing offtake of the basmati rice resulting into huge opportunity for players in the basmati rice segment. Basmati is patent-protected with a recent WTO ruling as a result of which only particular varieties grown in India and Pakistan can be marked as Basmati rice.
Basmati rice industry

Domestic (0.4 mn tonnes) Exports (1.1 mn tonnes) Domestically consumed
Head rice (1.5 mn tonnes) India (2 mn tonnes) Basmati rice production (2.6 mn tonnes) Pakistan (0.6 mn tonnes) Source: B&K Research Broken (0.5 mn tonnes)
Mostly exported
India catering to 75% of global basmati demand
Basmati rice commands business dynamics which are totally different from non-basmati rice. The basmati rice market worldwide is Rs. 60 bn which is being catered to by India (Rs. 45 bn) and Pakistan (Rs. 15 bn). In India, basmati rice market is estimated to be around Rs. 10 bn which consists of branded and unbranded basmati rice contributing 33% and 67%, respectively. Consumption of basmati rice has grown with a CAGR of 26% between FY01-04. Around 35% of processing is controlled by organised players and major sourcing of basmati paddy is done from Haryana, Uttar Pradesh, Punjab and Uttaranchal having a share of 50%, 25%, 18% and 7%, respectively.
Basmati rice composition Domestic

In terms of value
95%
In terms of quantum
98%
5%
Non bas mati rice Bas mati rice
2%
Proportion
11
B&K RESEARCH The principal aspects of the basmati rice business comprises of: Paddy trade
MARCH 2007
Basmati paddy traded through mandis
Paddy for basmati rice is sold directly through the government controlled mandis and do not depend on the Minimum Support Price (MSP) fixed by the government. Though the market is organised, it is fragmented into numerous traders and various agents. Basmati is a stable crop and it does not require much rainfall as compared to non-basmati. Prices of basmati paddy remain relatively stable and have not fluctuated substantially over the last decade. It enjoys a high export orientation and the governments export-import policy can affect the prices. Distribution The distribution of basmati rice in India comprises of wholesaler, retailers and dealers. The movement of finished product begins from the plant to wholesalers who, in turn, sell to retailers and dealers. In the present scenario, there is a gradual shift towards branding basmati and selling it through large retail malls, concentrating little on the wholesalers. Basmati rice demand is expected to increase constantly across a number of countries, signifying immense potential for growth. Exports The government is aggressively promoting export of basmati rice as compared to nonbasmati. In the non-basmati rice the government first uses it for self-sufficiency and discourages imports, through tariffs. The export market for basmati rice is expected to grow at 6-8% due to strong demand from Saudi Arabia and other Gulf countries where the customers have higher preference for basmati rice. Saudi Arabia is the major export market for Indian basmati rice with the total size of approximately Rs. 30 bn. Natural competitive edge The foothills of the Himalayas provide the distinct natural conditions and the soil required for the cultivation of this scented rice. India and Pakistan are the only two countries in the world producing basmati rice. The trade in basmati rice over the last five years has been:
Growth expected at 6-8% p.a.
Total basmati and proportion of India and Pakistan

2.5 2.0 Mn tons 1.5 1.0 0.5 0.0 FY01 FY02 FY03 FY04 FY05 37 63 70 55 50 50 45 51 49 59 41 60 40 30 20 10 0 Share (%) 50
Total
Source: APEDA
India
Pakis tan
12
B&K RESEARCH Ageing
MARCH 2007
18-24 months of ageing required
Ageing is the period between paddy procurement and processing. The fragrance and cooking qualities of basmati rice are enhanced with ageing. In fact, for basmati rice to be marketable, the product needs to be aged for 18 to 24 months as fully matured basmati rice fetches a premium realisation. Due to the ageing, companies need to have high inventory levels making the basmati processing a highly capital-intensive business. The procurement season typically commences in September each year with inventory being piled up till February and March, which mark the end of the procurement season. Companies need to procure the paddy during this period only to get high quality paddy at the lowest cost. In case the procurement goes beyond the season, costs could go up by 15-20% with comparative lower quality of paddy. Thus, the companies need to maintain high stocks throughout the year which creates a demand for higher working capital.
Paddy procurement period September to March
SWOT analysis
Strengths
Geographical constraint limited supply. Inelastic demand low substitutability. Branding better price realisation.
Opportunities
Greater assess to world market. High consumers demand-income increasing and going for quality products.
SWOT
Weakness
Little differentiation-low net margins. High working capital requirement due to ageing.
Threats
Appreciation of rupee reduces realisations on exports. Improved performance by Pakistan exports. Emergence of low cost synthetic substitutes.
Basmati supply chain (Paddy)

Agents Key link between the farmer and the miller
Agro commodities business requires efficient procurement of raw material for maintaining the quality of the final product. Large organised players have the advantage because the company deals through Atriyas (agent). Farmers bring their products to the Mandis, whereby open mandis atriyas buy the requisite paddy from the mandis on behalf of the company. Thus, the atriyas play the significant role in the procurement of paddy and ultimately become advantage to the large players.
Different stages for supply chain

Farmer Mandi Atriyas
Consumers
Distributor/Retailers
Millers
13
B&K RESEARCH
MARCH 2007
Non-basmati rice (Represented by LEAF and KRBL)

Regulations and policies
Minimum Support Price (MSP) Price of paddy is controlled by the government, by way of Minimum Support Price (MSP). To encourage the farmers to increase production, Government of India (GoI) announces MSP well in advance i.e. around sowing time of the crop. This assurance of the price is modulated through agriculture produce markets locally called Mandis. Food Corporation of India (FCI) is the organisation which undertakes procurement of paddy on behalf of GoI throughout the country. FCI purchases approx. 20-25% of the total rice production of the country both under levy from the rice mills and directly in the form of paddy from the farmers. The GoI classifies rice into two categories viz. common (length to breadth ratio less than 2.5) and Grade A (length to breadth ratio more than 2.5).
FCI procures paddy on behalf of GoI
Paddy MSP
700 600 Rs per quintal 500 400 300 200 100 0 FY03* FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY04 FY05 FY06 FY07 270 310 340 410 370 390 445 470 440 650 560 520 540 580 580 590 600 620
560 570 530 550 550 490 510
360 380 310 340
415
Common Grade 'A'
(*FY03 includes Rs. 20/quintal as DR (Drought Relief)) Source: Agricoop
Rice is procured by the government through statutory levy on rice millers and rice dealers. The percentage of levy on rice is fixed by the state governments with the approval of central government taking into account requirements for the central pool, domestic consumption and marketable surplus. GoI before commencement of every Kharif marketing season fixes levy rates on rice. Central Issue Price (CIP) The population in India is divided in two categories of Above Poverty Line (APL) and Below Poverty Line (BPL). The government supplies the rice through Targeted Public Distribution System (TPDS). The CIP is fixed on the recommendation of Commission on Agriculture Costs and Prices (CACP) and are highly subsidised for making available food grains for families under BPL.
14
B&K RESEARCH
MARCH 2007
Indian rice processing peer group

Particular Incorporated Areas of Operation Total capacity(TPH) Basmati Non-basmati Brands Rankings (domestic market) India Gate (21.8%) As per AC Nielsen ORG-MARG (#) Kohinoor (20.4%) Charminar (6.1%) Premium Popular Doon India Gate Kohinoor Trophy, Charminar, Falcon Kasauti Hungama, Mr. Miller, Real Magic Mass Industry position Football, Aarti Largest manufacturing facilities
* TPD (#) Lal Killa (9.6) and Shri Lal Mahal (3.4) of Shri Lal Mahal Group and Amar Singh Chawalwala have also been ranked whereas REI Agro has not considered in the rankings.
KRBL 1993 Basmati andnon-basmati 195.0 82.5 112.5
Kohinoor Foods 1989 Basmati 40.0 40.0
REI Agro 1994 Basmati 61.0 61.0
LT Overseas 1990 Basmati 30.5 30.5
Lakshmi Energy 1990 Non-basmati 2,100.0* 2,100*
Daawat (17.5%)
Daawat
Ruling the market with the Super brand Kohinoor
Hasnraj, Mazaa Leadership in regards to turnover Largest nonbasmati players
15
B&K RESEARCH
Basic Information
Financials Year Ended FY06 Mar Mar Mar 9,440 9,315 10,713 12,476 660 694 5,399 6,011 6,712 7,515 208 270 7,248 9,331 11,507 12,879 325 577 747 327 809 FY07E FY08E FY09E FY06 FY07E FY08E (Rs mn ) (Rs mn) FY09E 887 377 997 FY06 15.2 10.6 17.0 Net Sales Reported N/P Adjusted EPS (Rs) FY07E 23.7 13.8 15.5 FY08E FY09E 30.7 11.0 17.0 36.5 12.8 21.0 Market Cap
Basic Information

3,033 1,356 8,652 196 31 69
Company
Rec.
Price
(Rs mn) (US$ mn)
KRBL
M.P
125
Kohinoor Foods
M.P
69
REI Agro
Sell
193
Valuations
PER(x) FY08E 4.1 6.3 11.3 9.2 1.8 1.6 5.4 0.8 0.6 3.4 0.8 0.7 0.7 0.6 1.5 FY09E FY07E FY08E FY09E EV/Sales (x) EV/EBITDA (x) FY07E 5.9 8.3 9.3 FY08E 5.2 6.3 8.2 FY09E 4.7 5.9 7.3
Company
FY07E
KRBL
5.3
Kohinoor Foods
REI Agro
12.5
MARCH 2007
16
B&K RESEARCH
MARCH 2007
Companies
17
B&K RESEARCH
MARCH 2007
Share Data
Mkt. Cap. Price Target Price BSE Sensex Reuters Bloomberg Daily Volume 52-week High/Low Issued Shares Rs. 3 bn (US$ 69 mn) Rs. 125 Rs. 154 12886 KRBL.BO KRB IN US$ 1.2 mn (Rs. 53.1 mn) Rs. 244/76 24.3 mn
KRBL
Bigger the Better
Market Performer
Khushi Ram and Behari Lal Ltd. (KRBL), was incorporated in 1993 as a trading company for agro products. It is the oldest rice miller and the largest exporter of basmati rice, in India as the promoter family has been in this business for over 115 years. The companys organic and inorganic growth plans have made it the largest processor of rice. We are initiating coverage with a Market Performer.
Year to March P&L Data (Rs. mn) Net Sales Operating Profit 7,248 826 320 9,331 1,290 577 11,507 1,625 747 12,879 1,860 887 FY06 FY07E FY08E FY09E CAGR (%) FY06-09E 21.1 31.1 40.4
Valuation Ratios
Year to 31 Mar. 2008E EPS (Rs.) +/- (%) PER (x) PBV (x) Dividend/Yield (%) EV/Sales (x) EV/EBITDA (x) 30.7 29.6 4.1 0.8 2.2 0.7 5.2 2009E 36.5 18.7 3.4 0.7 2.4 0.7 4.7
Net Profit Margins (%) EBITDA Net Profit Balance Sheet (Rs. mn) Total Assets Shareholders Funds Per Share Data (Rs.) EPS CEPS
11.4 4.5
13.8 6.2
14.1 6.5
14.4 6.9
7,547 2,664
9,027 3,171
10,664 3,842
12,174 4,645
17.3 20.4
15.2 20.8 2.0
23.7 30.1 3.0
30.7 37.8 4.0
36.5 44.0 5.0
33.8 28.3 35.7
Shareholding Pattern (%)

Promoters FIIs MFs ADRs/GDRs/Other Foreign Public & Others 50 1 4 14 31
Dividend Return (%) RoE RoCE
14.6 12.7
19.8 15.2
21.3 16.4
20.9 16.4
Relative Performance
250 200 150 100 50 0 Sep-05 Feb-06 May-05 Mar-07 Dec-04 Jun-06 Nov-06
KRBLs acquisition of Dhuri plant from Oswal Agro and its subsequent expansion makes it the largest processor of rice with a total capacity of 195 TPH. This has helped the company in expanding its product portfolio to include non-basmati rice and value-added by-products (such as bran oil, furfural oil and power) in addition to basmati rice. KRBL has a volume share of 23% in totality and India Gate, its major brand has a market share of 21.8%, in India (2005). (AC Nielsen ORG-MARG) The companys operating margins have improved with the concentration on high margin branded products as compared to private label products. At the current market price of Rs. 125, the stock is trading at 5.3x FY07E, 4.1x FY08E and 3.4x FY09E earnings. We believe the stock is fairly valued at these levels and hence at 5x FY08E EPS of Rs. 30.7 we give a target price of Rs. 154. We initiate coverage with a Market Performer rating. 18
KRBL (Actual) Sens ex
B&K RESEARCH
MARCH 2007
KRBL has expanded its business mix by foraying into non-basmati rice and by-products (value-added products like power and oil) which would be obtained from its Dhuri plant. It was previously deriving maximum of the revenues from the basmati rice by processing the same at its facility located in Ghaziabad. India Gate and Heritage are the two major brands of the company, contributing around 21% of the total revenues. Largest processing facility Dhuri plant KRBL has invested a sum of Rs. 1.1 bn to acquire a plant in Dhuri. The capacity of the plant stands at 150 TPH, acquired from Oswal Agro Furane. The market value of the assets taken over by the company of the Dhuri plant, stood at around Rs. 2.8 bn. The production from the plant commenced in October 2006. This facility has actually helped the company to reduce its dependence of the trading activity with the improvement in the margins with the effective utilisation of raw material and its by-products. The company has the largest capacity for rice processing after acquisition and expansion of its Dhuri plant. The new plant will be used for to produce the following:
50% Bas mati Job Work 25% Non-Bas mati
Capacity utilisation Dhuri plant

25%
1. Basmati rice 25% 2. Non-basmati rice 75% Of this 2/3rd will be job work for FCI and 1/3rd will be sold in the market. Value-added products Dhuri plant being an integrated plant helps the company to process its by-products like bran, husk and nakku at a single location. Bran oil, furfural oil and power are the three major value-added products that company gets after further processing of by-products. The company uses its by-products such as bran and husk for extraction of edible oil and power. The power generated will be used for captive consumption and surplus will be sold in the market. It has 10.5 MW, 10 TPD and 42 TPD capacity for power, furfural and rice bran oil, respectively, at Dhuri (Punjab) which would ultimately contribute to the bottomline of the company. KRBL has planned to add a bran oil refinery by the end of December 2007 with the total capex of Rs. 1-1.2 bn which would ultimately improve the oil realisations from Rs. 32/unit to more than Rs. 100/unit.
Source: Company
By-product processing to add to the bottomline
Integrated vs. Non-integrated

Input* By-products Bran Bran oil Husk Furfural Power Deoiled cakes Moisture By-products value addition
Source: Company
Non-integrated Proportion (%) 8.0 22.0 5.0 Rate per unit 5.5 1.5 Amount (Rs.) 44.0 33.0 77.0
Integrated Proportion 1.4 0.4 21.6 6.2 5.0 Rate Amount (Rs.) 46.0 22.0 75.0 16.0 159.0 32.0 50.0 3.5 2.5 (%) per unit
*100 kgs of paddy = (Head rice 50% and Broken rice 15%).
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B&K RESEARCH Power plant
MARCH 2007
Dhuri: KRBL is expected to derive additional revenue by selling its power generated from the plant at Dhuri with a capacity of 10.5 MW at a prefixed tariff of Rs. 3.49/ unit for promotion of non-conventional energy. It is expected that the captive consumption and sale of power generated from such plant will be in the ratio of 1:1. The capex required for the same is Rs. 640 mn and is being funded through debt and internal accruals of Rs. 500 mn and Rs. 140 mn, respectively. Ghaziabad: The power cost of the company is expected to decline, due to captive consumption of power generated from its 3.6 MW power plant. The plant is also eligible for carbon credits worth Rs. 8 mn p.a. and would be operational by March 2007. The cost saving would result in improvement in EBITDA margins. Dhulia: The company is also focusing on power generation from wind farms and has made expansion in this area by setting up a 12.5 MW power plant at Dhulia (Maharashtra) which has been commissioned in September 2006. It has already signed Power Purchase Agreement (PPA) agreement with Maharashtra State Electricity Board (MSEB) for sale of wind power for 13 years at the tariff rate of Rs. 3.50/unit and annual increment of Re. 0.15/unit. The company shall also derive depreciation and tax benefits from this area. The company can generate carbon credits worth Rs. 6 mn p.a. from this plant. Total revenue generated from the above three projects shall have a 100% tax relief. International presence KRBL has an international presence with almost 54% of the revenues being generated from the overseas market. The export income has grown at a CAGR of 13.2% between FY00-06. Contribution of Indias basmati rice exports to USA stands around 2 % and KRBL commands 50% of the total basmati exports to the US. The total basmati rice export from India is mainly to Middle East contributing 75%. In Middle East, Saudi Arabia is the biggest market for Indian basmati rice with contribution of 60% of the total imports in the region. The company currently has a market share of 10% in Saudi Arabia, which is expected to grow further with the expansion of parboiled unit at Dhuri supplying its product mainly to this market.
Power generation at different locations to reduce cost and also generate additional revenues
Contribution by KRBL in global and USA markets

17% 47% 2% 0% 0%
52% 48%
34% Africa North America Aus tralia

Source: Company
Middle Eas t South Eas t As ia Europe
KRBL s hare Res t of exporters from India
20
B&K RESEARCH Contract farming
MARCH 2007
45% of paddy from contract farming
KRBL currently obtains about 45% of its basmati paddy requirements through contract farming. The company has entered into an agreement to undertake contract farming in an area of 180,000 acres by 2010 which is presently done on 87,000 acres of land. It has also established 750 acres seed farm along with 4 TPH seed plant for supplying quality seed to farmers and its agri-division, which works closely with the farmers during each stage of paddy cultivation. The Punjab government has also given the approval to set up 10 mandis to the company. Strong brand recall The company has brands like India Gate, Doon, Nurjahan, Bemisal, Aarti, Indian Farm and Unity in basmati rice segment. Branded rice contributes around 83% of KRBLs revenue. In the Indian branded rice market, the company contributes 30% and its brand India Gate occupies 22% of market share. KRBL also has plans lined up to sell non-basmati rice in branded form. Though branding, the company is looking at getting itself into a position to pass on the rise in raw material prices to consumers.
83% of revenues from branded sales
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B&K RESEARCH
MARCH 2007
Valuations
The factors poised to contribute to the growth of the company are: Expanding the product range KRBL has broadened its business mix by focusing on non-basmati rice, in addition to the basmati rice, its traditional revenue generating activity. The company is concentrating on increasing its share in the non-basmati segment, as the same accounts for 98% of the total rice production in the domestic market which is mostly dominated by small and medium sized unorganised players. The companys Dhuri plant is now fully integrated for producing bran oil, furfural oil and power. The company will further expand the plant by adding oil refinery. Benefits of scale KRBL also expects a robust growth both in the topline as well as the bottomline mainly due to volume play, as it has the highest processing capacity in the country. Increase in exports The company is also concentrating on the sale of its branded products in the export markets which is expected to improve the margins further, as compared to private labels exports. Improvement in margins By-products generated from the job work for FCI would provide enough scope to operate oil refinery, power plant, etc. at the optimum level. Although, the increase of focus in non-basmati rice would generate lower margins but the overall margins of the company is expected to improve on account of rising exports and increased contribution from the sale of value-added products.
PER Band
350 300 250 200 150 100 50 0 Sep-04 Sep-05 Mar-05 Mar-06 Sep-06 Jul-04 Jul-05 Jul-06 May-05 May-06 Mar-07 Jan-05 Jan-06 Jun-04 Nov-04 Nov-05 Nov-06 Apr-04 Jan-07
10.7x 9.2x 7.7x 6.1x 4.6x
At the current market price of Rs. 125, the stock is trading at 5.3x FY07E, 4.1x FY08E and 3.4x FY09E. We believe the stock is fairly valued at these levels. We are initiating coverage with a Market Performer rating at a target price of Rs. 154 at 5x FY08E EPS of Rs. 30.7.
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B&K RESEARCH
MARCH 2007
Business overview
Background
Largest rice miller in India
KRBL is the largest rice miller in the world and the oldest in India. It is one of the major players in the branded food industry and also the largest exporter of basmati rice from the country. KRBL was started as a partnership firm in the year 1988 under the name and style M/s. K.B. Overseas, the partners being Mr. Anil K. Mittal, Mr. Anoop K. Gupta and Mr. Arun K. Gupta. KRBL was incorporated in 1993 by the partners of the firm with the intention to takeover the operations and businesses of the partnership firm. The promoters of the company hail from an old business family engaged in the trading of agro products since 1889 in Lyallpur (presently in Pakistan).The family operated as commission agents and traders of various agro products after the partition of the country and split in the family. The processing activity of the firm started in 1992 before which they were a merchant exporter of rice along with the group firm M/s. Khushiram Beharilal (Export Division).
Promoters/Management
Mr. Anil Kumar Mittal (55), Chairman-cum-Managing Director of the company has an experience of more than 34 years. He is responsible for the formulation and implementation of marketing strategies in the organisation.
Experienced management
Mr. Arun Kumar Gupta (49), Joint Managing Director has an experience of more than 25 years and plays an active role in operations of the plant, especially in procuring good quality paddy. Mr. Anoop Kumar Gupta (47), Joint Managing Director with the experience of 24 years, manages the accounts, finance and administration departments.
Equity history (Nos. mn)

Duration Issued Increase capital 1993-95 1995-99 1999-03 2003-05 2005-06* 2006-07# 7.2 9.9 14.9 17.9 21.3 24.3 2.7 5.0 3.0 3.4 3.0 Face value (Rs.) 10.0 10.0 10.0 10.0 10.0 10.0 Inception of the company Public issue Preferential issue Preferential issue Issue of 3.4 mn equity share against 1.7 mn GDRs. Conversion of warrants Particulars
* KRBL issued 3.43 mn shares at a price of Rs. 155.08 to raise Rs. 531.7 mn in exchange of 1.71 mn GDRs issued at a price of US$ 7/GDR in February 2006. The conversion was 2 shares each for a single GDR. The GDRs are listed on the Luxembourg Stock Exchange. #The company has also issued 3 mn equity shares (12% post issue stake) to Reliance Commodities (P.) Ltd. DMCC, (Dubai, UAE) by converting 3 mn zero coupon warrants in 1QFY07 at a price of Rs. 90/share. Omar Ali Balsharaf Trading, one of the leading super market chain and FMCG trader in Saudi Arabia has also taken 6% stake through the preferential allotment at Rs. 90/share.
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B&K RESEARCH
MARCH 2007
Manufacturing facilities
Rice: The company has two rice processing facilities one in Dhuri (Punjab) and Dadri, Ghaziabad (UP) with the capacity of 150 TPH and 45 TPH, respectively. The facility in Ghaziabad is only for basmati rice processing. The company utilises its Dhuri facility for basmati rice, non-basmati rice and for the job work of FCI (nonbasmati) with the proportion of 25%, 25% and 50%, respectively. This gives the company enough scope to foray into non-basmati rice processing and effective utilisation of by-products generated from non-basmati rice processing. Power: The company has already entered into power generation activity with its first wind farm at Dhulia (Maharashtra) with the capacity of 12.5 MW. It has also started utilising its by-product husk for power generation at two locations at Dhuri (Punjab) and Dadri (UP) with the capacity of 10.5 MW and 3.6 MW. Oil: It has also started generating revenues from 2 types of oil i.e. furfural and bran oil with the capacity of 10 TPD and 42 TPD, respectively, through utilisation of bran. Packaging unit: It has two units one each in Alipur (Delhi) and Gandhidham, Kandla (Gujarat) for grading, sorting and packaging of basmati rice and various other by-products.
Production capacities
Product Paddy processing (TPH)# Facility location (a) Dhuri (Punjab) (b) Ghaziabad (U.P) Total Power (MW) From wind farm From husk Dhulia (Maharashtra) (a) Dhuri (Punjab) (b) Ghaziabad Total Furfural oil (TPD) Bran oil (TPD) Packaging unit (TPH)* Dhuri (Punjab) Dhuri (Punjab) (a) Alipur (Delhi) (b) Gandhi dam (Kandla) Total
Source: Company
Capacity 150 45 195
Storage space 132 acres open storage and 4 lacs sq.ft. warehouse. (@)Mill area .68 mn sq yards 150,000 MT space for storage and 7 lacs sq.ft. warehouse. Mill area .45 mn sq. yards
12.5 10.5 3.6 26.6 10 42 30 40 70 1.2 lacs sqft ware house. 1.3 lacs sqft ware house.
Note: # Paddy milling. *Rice processing/packaging facilities (Domestic sales). @Another 6 lacs sq.ft. under construction.
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B&K RESEARCH
MARCH 2007
Procurement & Distribution network

Developing mandis
KRBL procures its raw material in two ways firstly from contact farming and secondly from purchase from mandis. The government has granted 10 mandis to KRBL at different locations in Punjab. Out of these 10 mandis, 2 will be developed by the end of FY07 and the remaining 8 will be developed by the end of FY08. Punjab, Haryana, Uttaranchal and Uttar Pradesh (combined) are the major states for procurement of paddy in the proportion of 20:30:50.
Procurement states
States UP and Uttaranchal Haryana Punjab Contract farming 40 0 4 Mandis 10 30 16 Total 50 30 20
It also has a wide spread presence for distribution of its finished goods through 2 lakhs retailers supported by 71 distributors and 454 dealers in the domestic market. KRBL has also entered into agreements with retail chains like Big Bazaar, Dmart, Nil Giri, Food Land, Shoppe Rite, V-Mart, Vishal Mega Mart, Spencer Plaza and Reliance Retail to expand its products reach for its customers.
Brands
KRBL has over the years launched a number of brands in the domestic and export markets. The company is catering to variety of customers around the globe with around 29 brands in different segments. It has a brand valuation of Rs. 2.8 bn valued by Trisys a Kolkata-based research agency.
India Gate largest selling rice brand in India
Domestic market: In the domestic market, India Gate, Doon, Nur Jahan, Bemisal, Royal, Lotus, Aarati, etc. are the most famous brands of the company contributing around 35% of the domestic sales. Its brand India Gate has been ranked as the largest selling brand in the domestic market in 2005 and has contributed 42% in total revenues of the company. Export market: In the export markets, the key brands generating maximum revenues are India Gate, Doon, Nur Jahan, Al Wissam, Al Bustan, Indian Farm, etc. India Gate is marketed under the name of Babal Hind in worlds largest basmati market, Saudi Arabia, with its partner, Omar Ali Balsharaf Trading and is the second largest brand in Saudi Arabia. It plays a dominant position in the North American markets also.
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B&K RESEARCH
MARCH 2007
Change in business mix

Rice Before Expansion* Edible Oil Seeds & Pulses Segments Rice Edible Oil After Expansion Fuel Additive Power Cattle feed Pulses & Seeds : (Basmati, Non-basmati) (Raw, Brown, Parboiled) : Rice Bran Oil : Furfural Oil : Steam generation from Husk : Deoiled Cakes : (Basmati, Non-basmati) (Raw, Brown, Parboiled) : Rice Bran Oil
Non-basmati to complement basmati processing
Note: *Before expansion KRBL was in non-basmati rice as trading activity.
KRBL derives revenues from rice and selling its by-products. It has now evolved from basmati into a rice company with a profitable presence in downstream products also. The companys business model comprises basmati rice on one hand and the downstream by-product generation of rice bran oil, furfural, power generation and cattle feed on the other. Rice constitutes both basmati and non-basmati rice. The company only processed the basmati rice earlier but with the expansion of Dhuri plant it has started processing the non-basmati rice also. Till FY06, the company was just purchasing non-basmati rice from various millers and selling it into the market. Dhuri plant gives KRBL the opportunity to strengthen its bottomline by expanding its portfolio to add power, bran oil and furfural oil in the revenue mix.
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B&K RESEARCH
MARCH 2007
Business segment
KRBL operates in the single segment of rice processing and selling of related by-products. The company sells its products both in domestic and export markets with the proportion of 46:54 in the favour of exports. The company is meeting the demand of around 25 states in India and 11 countries across the globe and the revenues have increased by 73% in domestic market and 26% in export market between FY05-06.
Business model Rice

Rice (92%)
92% revenues from rice

Domestic (44%) Exports (56%)
Branded rice (95%)
Unbranded rice (5%)
Branded rice (86%)
Unbranded rice (14%)
Price range: Basmati Rs. 20-80/kg Non-basmati Rs. 15-25/kg
Rice: It constitutes both basmati and non-basmati rice. KRBL plays a significant role in the rice industry. It is currently in the business of selling basmati rice after processing paddy and trading non-basmati rice. But with the expansion of Dhuri plant, it has also started processing non-basmati rice. Rice constituted 92% of the total revenue in FY06 as sales increased by 39% from Rs. 4.8 bn in FY05 to Rs. 6.6 bn in FY06. Major portion was derived from domestic market which increased by 68% and exports increased by 23% during FY06. The proportion of basmati and non-basmati rice in total rice is 76:24 for FY06. Going forward, the proportion will be almost same, to maintain the growth and pace of margins. The products of the company are available in the range of Rs. 20-80/kg and Rs. 15-25/kg for basmati and non-basmati, respectively. Average realisation is Rs. 23.5/kg for domestic.
Rice Revenue and growth (%)

8000 7000 6000 5000 4000 3000 2000 1000 0 -1000 FY00 160 140 120 100 80 60 40 20 0 -20
Basmati and non-basmati mix

100 25.3 75 50 74.7 25 0 FY04 Bas mati FY05 FY06 Non-bas mati 81.6 76.2 % 18.4 23.8
Rs. Mn
55.0 18.0
44.8 4.6 -19.4
39.2
FY01
FY02
FY03
FY04
FY05
Total
Source: Company
Growth (%)
FY06
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B&K RESEARCH
MARCH 2007 Value-added products: The company until FY05 was selling its entire husk and bran production, at prices of Rs. 1.5/kg and Rs. 5/kg, respectively but, from FY06, the same are further processed to obtain bran and furfural oil which have higher realisation as well as high margins. In FY06, rice bran (including bran oil) and furfural oil contributed 1.5% and 0.4%, respectively, amounting to a total of Rs. 140 mn. Others: KRBL also offers variety of products such as Pulses, Paddy, Seed and Scrap and others in addition to its main product, rice. In FY03, it forayed into sale of its quality rice seeds and wheat seeds, which have grown at a CAGR of 35% since FY03, amounting to Rs. 32 mn in FY06. Pulses and scrap constituted 4.6% and 1.3% in the total revenues of the company amounting to Rs. 332 mn and Rs. 94 mn, respectively.
Revenue break-up (FY06)

1% 53% 3% 2% 1%
40%
Rice-D Bran Puls es -E
Rice-E Puls es -D Scrap & Others
Exports
KRBL enjoys 11% share of Indias total basmati exports, with the major portion being exported under its own brands (86% in FY06 as compared to 75% in FY05). This fetches higher realisations and flexibility in transferring the hike in paddy cost to the consumers. Export revenues as a percentage of sales have declined from 63% in FY04 to 54% in FY06 because of reduction in exports under private label (from 25% in FY04 to 14% in FY06). However, this has resulted in high realisation on account of increase in branded sales. But the total exports increased by 26% from Rs. 3.1 bn in FY05 to Rs. 3.9 bn in FY06. It has good demand in the export market such as Saudi Arabia, Kuwait and USA and enjoys 10%, 10% and 50% of the market share, respectively. It has also entered into a marketing alliance with Omar Ali Balsharaf Trading (a leading super market chain and FMCG trader in Saudi Arabia) for strengthening the companys presence in worlds biggest basmati rice market and increasing its share in this market. The company is enhancing its direct presence in the large retail stores to further strengthen the direct sales of its own brands, resulting in improvement in the margins, visibility and reputation. The average realisation from basmati and non-basmati rice is Rs. 29.6/kg and Rs. 11.78/kg in FY06.
Source: Company
Marketing alliance in Saudi Arabia
Own and private labels in exports

100 24.4 75 25.5 14.0
Exports and Exports as % of sales

5000 4000 Rs. Mn 3000 2000 1000 0 FY00 FY01 FY02 FY03 FY04 FY05 85 100 78 74 70 80 63 61 54 60 40 20 0 FY06 % Exports Exports % of Sales
50 75.6 25 0 FY04 Own label FY05 74.5
86.0
FY06 Private label
Source: Company
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B&K RESEARCH
MARCH 2007
Benefits Due to Dhuri plant

The company has received various exemptions from the Punjab government in view of the investment made in the Dhuri plant: No mandi tax till 2015 (as against the existing rate of 4%). No rural development cess till 2015 (as against the existing of 1%). Exemption from Agricultural and Processed Food Products Export Development Authority (APEDA) registration to 0.1% (as against 1%). No electricity duty. No land registration fees up to 250 acres (as against the existing of 6%). Allowance on 10 private mandis to be treated at par with government operated mandis for direct procurement.
These concessions/exemptions have resulted in lower raw material costs, strengthening the companys edge in a competitive market place.
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B&K RESEARCH
MARCH 2007
Financial analysis
Revenue Revenues of the company are expected to post a CAGR of 21% from Rs. 7.2 bn in FY06 to Rs. 12.9 bn in FY09E. The growth will be on account of increase in capacity utilisation because of the completion of the refurbishment and expansion programme of Dhuri and other plant locations. There has been a reduction in export sales on account of lower sales in the private label. The company expects the exports to increase on account of increase in branded product sales, which realises higher price. Margins The EBITDA margin is expected to increase by 300 basis points to 14.4% for FY09E from the current level of 11.4% for FY06. The increase is expected to be on account of the following: Increase in capacity utilisation post completion of expansion in capacities. Increase in sales of branded products in the overseas market which has higher realisation and higher margins as compared to sales in the domestic market and sales under private label in the overseas market. Increase in revenue from value-added products on account of higher production due to completion of the expansion programme. The increase in EBITDA margins will also lead to growth in PAT margins which is expected to grow from 4.5% in FY06 up to 7% by FY09.
Turnover and its growth (%)

14 12 10 8 Rs. bn 6 4 2 0 -2 FY07E FY08E FY09E FY02 FY03 FY04 FY05 FY06 5.8 -19.4 46.6 44.2 28.7 23.3 11.9 Turnover Growth (%) 140 120
Earnings and its margins (%)

2000 Rs. Mn 1500 1000 500 0 FY07E FY08E FY09E FY02 FY03 FY04 FY05 FY06 8.3 4.3 5.7 2.7 6.4 3.0 7.6 3.3 4.5 11.4 13.8 14.1 6.2 6.5 14.4 6.9 20 15 10 5 0 %
100 80 60 40 20 0 -20 %
EBITDA PAT EBITDA Margin PAT Margin
Source: Company
Turnover ratio
Working capital turnover ratio of the company has decreased from 3.6 in FY03 to 1.9 in FY06. Inventory and Debtors levels to sales are expected to be maintained at the current levels.
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B&K RESEARCH
MARCH 2007
Working capital and Inventory turnover ratio

4 3 2 1 % 2.6 1.5 2.0 1.3 0.9 FY03 FY04 FY05 FY06 1.0 FY07E 1.1 FY08E 1.1 FY09E 3.6 2.6 2.4 1.7 1.9 1.9 1.9 1.9
0 FY02
Working capital turnover ratio

Source: Company
Inventory turnover ratio
Financial highlights (9 Monthly)

(Rs. mn) Net Sales EBITDA EBITDA Margins (%) Other Income Interest Depreciation PBT Tax Adjusted PAT PAT Margins (%) EPS (Rs.) 3QFY06 2,148 266 12.4 11 (83) (35) 159 (54) 105 4.9 6 3QFY07 2,795 385 13.3 14 (151) (50) 199 (9) 190 6.8 8 YoY (%) 30.1 44.6 31.5 82.2 40.7 25.0 (84.1) 80.6 9MFY06 5,435 645 11.9 25 (194) (82) 394 (131) 263 4.8 15 9MFY07 6,976 994 13.7 36 (336) (119) 576 (94) 482 6.7 20 YoY (%) 28.3 54.1 45.2 73.2 44.8 46.2 (28.1) 83.0
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B&K RESEARCH
MARCH 2007
Detailed financials
Income Statement
(Rs. mn) Net sales Growth (%) Operating expenses % to net sales Raw material cost RM as % of cost RM as % of Net sales FY03 5,895 46.6 5,561 94.3 4,492 80.8 76.2 FY04 4,754 -19.4 4,451 93.6 3,582 80.5 75.3 203 4.3 60 1.3 91 1.9 47 1.0 112 2.5 357 10.0 303 6.4 0 303 6.4 72 35 266 54 212 212 67 145 3.0 FY05 5,027 5.8 4,643 92.4 3,645 78.5 72.5 295 5.9 68 1.3 118 2.3 104 2.1 127 2.7 287 7.9 384 7.6 0 384 7.6 74 32 342 86 256 256 92 165 3.2 FY06 7,248 44.2 6,440 88.9 4,940 76.7 68.2 591 8.1 94 1.3 126 1.7 186 2.6 173 2.7 331 6.7 807 11.1 18 826 11.4 119 57 764 278 486 486 162 325 4.4 FY07E 9,331 28.7 8,061 86.4 6,307 78.2 67.6 467 5.0 121 1.3 164 1.8 294 3.2 261 3.2 447 7.1 1,270 13.6 20 1,290 13.8 156 76 1,210 329 881 881 304 577 6.2 FY08E 11,507 23.3 9,904 86.1 8,097 81.8 70.4 230 2.0 127 1.1 209 1.8 383 3.3 322 3.3 536 6.6 1,603 13.9 22 1,625 14.1 172 98 1,551 410 1,141 1,141 393 747 6.5 FY09E 12,879 11.9 11,043 85.7 9,085 82.3 70.5 129 1.0 142 1.1 251 2.0 457 3.6 386 3.5 592 6.5 1,836 14.3 24 1,860 14.4 182 121 1,799 446 1,353 1,353 466 887 6.9
Finished Goods purchased 265 % of Net Sales Employee expenses % of Net Sales Power & Fuel % of Net Sales 4.5 59 1.0 74 1.3
Selling & Distribution expenses 111 % of Net Sales Administrative expenses % of Net Sales Other expenses % of Net Sales Operating Profit 1.9 114 2.0 446 9.9 334
Operating profit Margin (%) 5.7 Other Operating Income EBITDA EBITDA Margin (%) Depreciation Other income EBIT Interest paid 0 334 5.7 57 72 349 131
Pre-tax profit 218 (before non-recurring items) Pre-tax profit 218 (after non-recurring items) Tax (current + deferred) Net profit PAT Margin (%) 59 159 2.7
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B&K RESEARCH
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Balance Sheet
(Rs. mn) Current assets Net fixed assets Total assets Current liabilities Total debt - Short term - Long term Other non-current liabilities Total liabilities Share capital Reserves & surplus - Retained Earnings Less: Misc. expenditure Shareholders funds Total equity & liabilities Capital employed FY03 2,409 611 3,020 366 1,563 1,507 56 5 FY04 2,600 810 3,410 185 1,701 1,587 114 28 1,914 177 1,319 898 (1) 1,495 3,410 3,224 FY05 4,145 1,082 5,227 428 2,959 2,664 295 57 3,443 332 1,451 1,020 0 1,783 5,227 4,799 FY06 6,075 1,472 7,547 285 4,519 3,838 681 80 4,883 471 2,193 1,285 0 2,664 7,547 7,262 FY07E 7,672 1,354 9,027 345 5,271 4,572 698 241 5,856 244 2,927 1,792 0 3,171 9,027 8,682 FY08E 9,294 1,370 10,664 427 5,946 5,178 768 449 6,822 244 3,598 2,463 0 3,842 10,664 10,237 FY09E 10,839 1,335 12,174 458 6,375 5,538 837 696 7,529 244 4,401 3,266 0 4,645 12,174 11,716
1,934 137 950 793 (2) 1,086 3,020 2,654
Cash Flow Statement

(Rs. mn) Pre-tax profit Depreciation Chg in working capital Total tax paid FY03 218 47 (255) (20) FY04 212 67 (235) (76) FY05 256 70 (1,402) (62) FY06 486 116 (1,547) (128) FY07E 881 145 (1,959) (127) (1,060) (27) (0) (27) (1,087) (0) 752 (55) 696 (391) FY08E 1,141 164 (1,707) (175) (577) (180) (0) (180) (756) 0 676 (69) 606 (150) FY09E 1,353 174 (1,388) (211) (72) (139) (0) (139) (211) 0 429 (76) 352 142
Cash flow from oper. (a) (10) Capital expenditure Other investing activities (184) 0
(32) (1,138) (1,072) (266) (17) (283) (341) 0 (341) (507) 0 (507)
Cash flow from inv. (b) (184) Free cash flow (a+b) Equity raised/(repaid) Debt raised/(repaid) Dividend (incl. tax) (194) 5 288 (24)
(314) (1,479) (1,579) 304 138 (34) 409 94 166 1,258 (20) 1,403 (76) 615 1,560 (41) 2,135 555
Cash flow from fin. (c) 268 Net chg in cash (a+b+c) 75
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B&K RESEARCH
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KRBL
Income Statement
Yr ended 31 Mar (Rs. mn) FY06 . . Net sales Growth (%) Operating expenses Operating profit Other operating income EBITDA Growth (%) Depreciation Other income EBIT Interest paid Pre-tax profit 7,248 44.2 (6,440) 807 18 826 115.1 (119) 57 764 (278) 486 FY07E 9,331 28.7 (8,061) 1,270 20 1,290 56.2 (156) 76 1,210 (329) 881 881 (304) 577 577 77.6 577 FY08E 11,507 23.3 1,603 22 1,625 26.0 (172) 98 1,551 (410) 1,141 1,141 (393) 747 747 29.6 747 FY09E 12,879 11.9 1,836 24 1,860 14.5 (182) 121 1,799 (446) 1,353 1,353 (466) 887 887 18.7 887
Cash Flow Statement

Yr ended 31 Mar (Rs. mn) FY06 . . Pre-tax profit Depreciation Chg in working capital Total tax paid Capital expenditure 486 116 (1,547) (128) (507) FY07E 881 145 (1,959) (127) (1,060) (27) (27) (1,087) 0 752 (55) 696 (391) 676 (69) 606 (150) 429 (76) 352 142 FY08E 1,141 164 (1,707) (175) (577) (180) (180) (756) FY09E 1,353 174 (1,388) (211) (72) (139) (139) (211)
(9,904) (11,043)
Cash flow from oper. (a) (1,072) Cash flow from inv. (b) (507) Free cash flow (a+b) (1,579) Equity raised/(repaid) Debt raised/(repaid) Dividend (incl. tax) Net chg in cash (a+b+c) 615 1,560 (41) 555
(before non-recurring items) Pre-tax profit 486 (after non-recurring items) Tax (current + deferred) Net profit Adjusted net profit Growth (%) Prior period adjustments Net income (162) 325 325 97.3 (4) 320
Cash flow from fin. (c) 2,135
Key Ratios
Yr. ended 31 Mar. (%) FY06 EPS (Rs.) EPS growth EBITDA margin EBIT margin ROCE Net debt/Equity 15.2 66.3 11.4 10.5 12.7 144.5 FY07E 23.7 55.7 13.8 13.0 15.2 157.4 FY08E 30.7 29.6 14.1 13.5 16.4 151.4 FY09E 36.5 18.7 14.4 14.0 16.4 131.4
Balance Sheet
Yr ended 31 Mar (Rs. mn) FY06 . . Current assets Net fixed assets Total assets 6,075 1,472 7,547 FY07E 7,673 1,354 9,027 FY08E 9,294 1,370 10,664 FY09E 10,839 1,335 12,174
Valuations
Yr. ended 31 Mar. (x) PER PCE Price/Book Yield (%) EV/Net sales EV/EBITDA FY06 8.2 6.0 1.0 1.8 0.9 7.9 FY07E 5.3 4.1 1.0 2.0 0.8 5.9 FY08E 4.1 3.3 0.8 2.2 0.7 5.2 FY09E 3.4 2.8 0.7 2.4 0.7 4.7
Current liabilities Total Debt
285 4,519
345 5,271 241 5,856
427 5,946 449 6,822
458 6,375 696 7,529
Other non-current liabilities 80 Total liabilities 4,883
Du Pont Analysis ROE

Share capital Reserves & surplus Shareholders funds 471 2,193 2,664 244 2,927 3,171 9,027 8,682 244 3,598 3,842 10,664 10,237 244 4,401 4,645 12,174 11,716 Yr. ended 31 Mar. (x) Net margin (%) Asset turnover Leverage factor Return on equity (%) FY06 4.5 1.1 2.9 14.6 FY07E 6.2 1.1 2.8 19.8 FY08E 6.5 1.2 2.8 21.3 FY09E 6.9 1.1 2.7 20.9
Total equity & liabilities 7,547 Capital employed 7,262
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B&K RESEARCH
MARCH 2007
Share Data
Mkt. Cap. Price Target Price BSE Sensex Reuters Bloomberg Daily Volume 52-week High/Low Issued Shares Rs. 1.4 bn (US$ 31 mn) Rs. 69 Rs. 66 12886 SATN.BO KFL IN US$ 0.2 mn (Rs. 8.8 mn) Rs. 112/52 20 mn
Kohinoor Foods
Kohinoor The Super brand
Market Performer
Kohinoor Foods Ltd. (KFL) is the only integrated player in food industry. The company had recently gone on a major expansion drive to capture global markets and the growth in the food chain business, thereby leading to increased demand for Ready-to-Eat products. We are initiating coverage with a Market Performer.
Year to March P&L data (Rs. mn) Net Sales Operating Profit Net Profit Margins (%) EBITDA Net Profit Balance Sheet Data (Rs. mn) Total Assets Shareholders Funds Per Share Data (Rs.) EPS CEPS 10.6 15 2.2 13.8 19 2.5 11.0 16 3.0 12.8 18 3.5 6.3 7.2 16.7 5,254 1,184 5,573 1,410 6,274 2,504 6,939 2,769 9.7 32.7 8.0 3.9 9.6 4.5 10.1 4.9 10.4 5.0 5,399 433 208 6,011 575 270 6,712 675 327 7,515 778 377 FY06 FY07E FY08E FY09E CAGR (%) FY06-09E 11.7 21.5 22.0
Valuation Ratios
Year to 31 Mar. 2008E 2009E EPS (Rs.) +/- (%) PER (x) PBV (x) Dividend/Yield (%) EV/Sales (x) EV/EBITDA (x) 11.0 (19.8) 6.3 0.8 4.3 0.6 6.3 12.8 15.5 5.4 0.7 5.1 0.6 5.9

Promoters FIIs MFs Institutions Public & Others 44 7 6 3 40
Dividend Returns (%) RoE RoCE
18.5 8.9
20.8 10.1
16.7 10.5
14.3 10.9
250 200 150 100 50 0 Sep-05 Oct-06 Feb-06 May-05 Mar-07 Dec-04 Jun-06
It is the only Indian integrated food company having control on the entire value chain along with global manufacturing and servicing capabilities. The company has credible infrastructure and supplying capabilities along with shelf ready packaging. The value-added Ready-to-Eat market has enormous potential for expansion. The export potential for ethnic Indian food is expected to increase significantly. KFL foresees enhanced profitability through improved efficiencies and focus on high margins generating segment i.e. Branded Food segment. It is focusing on enhancing the branding of Kohinoor by foraying into new markets and expects to add 10 new countries in its global presence by the end of FY09. It has a diversified business model spread over varied customer groups and countries. At the current market price of Rs. 69, the stock is trading at 5x FY07E, 6.3x FY08E and 5.4x FY09E earnings. The stock has discounted the upsides at these valuations. We value the company at 6x FY08E EPS of Rs. 11 and give a target price of Rs. 66. We initiate coverage with a Market Performer rating. 35
Kohinoor Foods (Actual) Sens ex
B&K RESEARCH
MARCH 2007
Kohinoor is changing its image as an integrated player from a commodity player. Its flagship brand Kohinoor has worldwide recognition for its authentic and quality food offerings. It has been awarded the Super Brand status in 2005-06 in rice category.
Growth in earnings and margins

Potential in Ready-to-Eat (RTE) market The ready-to-eat market is gaining momentum due to increase in its demand mainly from UK, USA and European nations. The RTE industry is expected to witness a significant growth in the domestic market too, mainly on account of large number of modern retail chains being set-up and also the changing lifestyle of the masses. Change in the business mix KFL gradually shifted its focus to Branded Food segment in FY05 from unbranded sales and trading in commodities. Though, the latter were the traditional business activities of the company and had maximum contribution in the topline but the margins were relatively low at around 2-3%. The revenues from branded and unbranded sales were in the ratio of 55:45 for FY06 which is expected to be 78:22 by FY09E.
Demand influenced by changing tastes and lifestyle
Spectrum of business
Branded Basmati Rice
Branded revenues to increase from 55% to 78%
KFL
Ready-to-Eat (RTE) Unbranded and Commodity Sales
Current focus area (High margins products)
Source: Company
Branded basmati rice: The revenue (domestic and exports) from this stream is currently around 51% and is expected to increase to 70% over the next two-three years, as the company is making continuous efforts to tap the opportunities available in the export markets. The company is targeting at least 10% of the market share in Saudi Arabia.
Huge potential in export market
RTE: KFL entered the food business with the launch of its products under ambient foods and expanded the product portfolio with frozen foods. It further plans to foray into chilled food. The quantum of revenues from frozen and chilled food is expected to be 4 times and 8 times that of ambient food sales. There is a huge demand of RTE products in UK and USA, the largest markets for such products and the company is betting big to have a substantial market share in such market. Export oriented KFL earned a substantial portion of its revenues i.e. approximately 55%, amounting to Rs. 3 bn in FY06, from the export markets. The company is poised to increase its revenues from the export markets further to 72% by FY09E through sale of RTE products and branded basmati rice in the Europe and Middle East, respectively. 36
Eye on export market for further growth
B&K RESEARCH
MARCH 2007 In the global markets (like Saudi Arabia and Europe) also there is ample scope to grow. KFL has appointed its distributor Al-hokair in Saudi Arabia to garner at least 10% of the market share of the total market estimated at Rs. 30 bn, by FY09. The UK facility has been made fully operational which will be catering to the European markets. Tapping the opportunities in unorganised market KFL being one of the organised players is making continuous efforts to tap the unorganised market, on the back of its brand, latest machinery for making quality rice through paddy processing, vast distribution network, global presence and other economies of scale.
Support system
Brand recognition Kohinoor Foods Limited is emerging as a global food company with its flagship brand Kohinoor which has been awarded as a Super brand. It is the only Indian brand with presence in 47 countries marketed through own distribution and available on more than 30,000 retail outlets located overseas. It is focusing on becoming the first truly global culinary brand in the world. It has emerged as the largest selling brand in India with a market share of 38% in Indian branded basmati market worth US$ 100 mn (Source: AMGF Brand Study Ernst & Young 2004). Global presence KFL has global infrastructure in the form of subsidiaries, joint ventures, processing facilities and distribution network. It has two subsidiaries one each in US and UK, a rice polishing mill in UK and a joint venture in UAE. The company has a distribution network in 45 countries supplying products to 60 countries. Knowledge resource KFL incurs a lot of expenditure on research and development to obtain customers, suppliers and farmers feedback to increase the quality of product and services rendered to customers and to increase the capabilities of procuring the raw materials and other supplies at best quality as well as price. It has also gained knowledge in respect of the operating style of modern retailing and global marketing techniques to have better margins while entering into any agreement with them or starting their own operations of the same level and size.
To become first Global Culinary Brand
Infrastructure to tap the global market
Market Knowledge the distinguishing feature
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B&K RESEARCH
MARCH 2007
Investment concerns
International conditions While major part of revenues (55% of revenues) are derived through export sales, the same is highly sensitive to government regulations. Competition Entry of large players in the retail segment may also lead to some of these players considering backward integration in certain areas like food processing, thereby creating direct competition for the company coupled with loss of sales. Preference for home cooked food in India The scenario in Indian markets for RTE products has not been a great success. The consumer still prefers the traditional style of cooking. The company might find it difficult to build a market for RTE products in the manner they have done for their branded basmati.
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B&K RESEARCH
MARCH 2007
Valuations
The growth of the company is expected to be driven by the following factors: Aggressive plans to explore new avenues in the international market for its products both for rice and Ready-to Eat. Goal to achieve a market share of 10% of the worlds largest branded basmati rice market (Saudi Arabia) estimated to be Rs. 30 bn by FY09. UK rice processing facility will help the company in maximising its revenues at a lower cost as it will be catering to the European markets. KFL has expanded its capacity for ambient food and has set-up a new facility for frozen food to cater the European markets considered as the largest market for such foods. It also plans to enter chilled food business as the market for the same is considered to be 4 times and 2 times larger than that of ambient and frozen foods, respectively. Modern retail format stores are the biggest opportunity in recent times, backed by the retail growth in semi- urban and rural India. KFL is entering into tie-up arrangements with large players in the retail as it has keen understanding of International retailing trends and merchandising at retail shelves. It also has its portfolio designed to cater such formats.
PER Band
180 160 140 120 100 80 60 40 20 0 Sep-04 Sep-05 Mar-05 Mar-06 Sep-06 Jul-04 Jul-05 Jul-06 May-05 May-06 Mar-07 Jan-05 Jan-06 Nov-04 Nov-05 Nov-06 Apr-04 Jun-04 Jan-07
12.1x 10.6x 9.1x 7.6x 6.1x
At the current market price of Rs. 69, the stock is trading at 5x FY07E, 6.3x FY08E and 5.4x FY09E earnings. The stock has discounted the upsides at these valuations. We value the company at 6x FY08E EPS of Rs. 11 and give a target price of Rs. 66. We initiate coverage with a Market Performer rating.
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B&K RESEARCH
MARCH 2007
Business overview
Background
Kohinoor Brand captures 38% market share
Incorporated in 1989, Kohinoor Foods Limited (KFL) erstwhile known as Satnam Overseas Limited got listed in 1994 and is a prominent player, emerging as a global food processing company. It has made significant presence in Branded Basmati and Ready-toEat (RTE) products. RTE segment consists of ambient, frozen and chilled food, and KFL is currently into ambient and frozen food business with plans to enter the chilled food segment within the next two years. KFL has three processing facilities with capacities of around 48 TPH at two units for rice processing and 50,000 meals/day and 20 MT/day for ambient and frozen food, respectively, for the third unit. KFL revenues for the FY06 were in the ratio of 45:55 from domestic and export markets. In the domestic branded basmati rice market, Kohinoor brand is enjoying 38% market share as per TNS-Ernst & Young. It also enjoys 52% (in value terms) and 49% (in volume terms) of the total organised basmati rice market in modern retail format stores in India as per ACNielsen ORG-MARG which makes the company a market leader in its industry.
Management
KFL was founded by Late Tirath Ram Arora in the year 1976 and is being now managed by Mr. Jugal Kishore Arora (Chairman and Managing Director) having three decades of experience in the basmati rice industry, Mr. Satnam Arora (Joint Managing Director) is responsible for managing the companys subsidiary and joint ventures abroad and Mr. Gurnam Arora (Joint Managing Director) manages the companys marketing and branding of Kohinoor.

Duration Issued Increase capital 1992-93 1993-94 1994-98 1998-05 8.0 10.0 14.0 19.6 2.0 4.0 5.6 Face value (Rs.) 10.0 10.0 10.0 10.0 Issued to existing shareholders. In 2005, issuance of another 4 mn of equity share. In 1998, the company has allotted 5.6 mn equity share as bonus issue in the ratio of 2:5. Particulars
Associate companies
Group enterprise Rich Rice Raisers Factory L.L.C Satnam Overseas Ltd. INC Country Dubai (UAE) New Jersey (USA) Incorporated 2000 2000 Holding Structure Joint venture (25%) Wholly owned Principal Activity Engaged in selling of companys products in UAE. Engaged in wholesale business of rice and other agro products imported from India and serving the entire US markets. Indo European Foods Ltd. Felixstone (UK) 2002 Wholly owned Started rice processing in FY06 and deals in RTE and allied food products.
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B&K RESEARCH
MARCH 2007
Processing facilities
KFL has 3 processing facilities, out of which 2 are for rice processing and 1 for RTE products. Processing of paddy is being done in Murthal (Haryana) and Felixstone (UK) with the capacity of 40 TPH and 8 TPH, respectively. KFL also had a rice processing capacity of 8 TPH in Amritsar (Punjab) which has been shifted to Murthal to concentrate its facilities at one place and derive benefits of lower stock requirement, fixed cost, working capital requirement and concentrating of management at a single place. The plant at UK has started commercial production in July 2006 and the capex for it was around US$ 6 mn for acquiring land and setting up of building. The sourcing of raw material for UK facility is done from India in the form of semi- processed rice to avoid duty, as import of fully processed rice in UK attracts the same. The semi-processed rice (brown rice) is further processed (white polishing) and sold in the European markets from there. Europe is considered to be the 2nd largest market for basmati rice in the world. RTE has the total capacity of 50,000 meals/day for ambient food and 20,000 kg/ day for frozen food segment. Frozen food capacity has been set up in July 2006 by the company with the capex of Rs. 250 mn at Bahalgarh (Sonepat, Haryana). The manufacturing facilities at Murthal and Bahalgarh are fully automated plants, the former being one of the largest basmati rice mill in India.UK is also considered as the largest market for Indian foods. The company has packaging capabilities in its existing facilities and is not dependent on outside packaging of its products. Flat & SUP Aluminum Retort Pouches, Microwaveable Transparent Retort Pouches, Multi Layer barrier Trays, Glass Jars, Aluminum Heat Sealable Containers, High Barrier Microwaveable Rigid Cups and PP Jars are the different forms of packaging done by the company for its products.
Processing facility at UK started commercial production in July 2006
Fully modernised plant
In-house capabilities
Particulars Rice Location Murthal (Haryana) Felixstone (UK) Total RTE Ambient (meals) Frozen (Kg) Bahalgarh (Sonepat, Haryana) Bahalgarh (Sonepat, Haryana) Area (Mn sq.ft.) 1.29 0.14 Capacity (TPH) 40 8 48 (Per day) 50,000 20,000
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MARCH 2007
Growth in production
70 Ton in thousand 60 50 40 30 20 10 0 -10 FY03 FY04 -2.6 FY05 FY06 53 63 61 64 35 30 25 20 15 10 5 0 -5 %
Growth in ambient food

10 8 Mn pouches 6 4 2 0 1.6 FY04 FY05 Actual production Increas e in production FY06 83.7 3.0 5.8 96.2 100 95 90 85 80 75 %
19.8
4.3
Actual production
Source: Company
Increas e in production
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B&K RESEARCH
MARCH 2007
Global presence
USA operations
The company had formed its wholly owned subsidiary in USA in 2000 as S.O.L. Inc. It achieved a turnover of US$ 3.6 mn in FY05-06. The US operation mainly consists of marketing & distribution with dedicated warehousing capabilities in New Jersey, Houston, Marryland, Chicago and San Francisco. It was previously marketing its products through distributors but has recently set-up its own distribution channel. The company has also introduced 3 product lines with more than 35 SKUs (Stock Keeping Units) in the overseas markets. Due to huge opportunity available for Indian foods, it is expected to improve its position to No.3 in two years time from 6th position, currently.
UK operations
It has formed a wholly owned subsidiary in UK in 2001 named Indo European Foods Limited. It started with a capacity of 8 TPH for rice polishing (to save import duty of 120 pound per tonne).The facility covers an area of 140 thousand sq.ft. It also has adequate space for further expansion (plans to set-up a chilled food plant). It started commercial production on July 2005 and accounted for a turnover of 4.6 mn pounds in FY05-06. The total funds invested by the company in its UK operations amounts to Rs. 290 mn. The company is expected to achieve economies of scale by end of FY07, on account of 100% utilisation of its capacities from such plant.
Dubai operations
In FY01, the company entered into a joint venture with Rich Rice Raiser Factory L.L.C (RRR) in Dubai to augment its marketing strengths in the Middle East region. The joint venture is with Sunny General Trading which hold 75% stake and has distribution network for food products in UAE for the past 15 years. RRR has a small rice processing facility besides a full fledged marketing office in Dubai. The company presently caters to the markets of Iran and plans to enter the Iraqi market soon. Due to the huge on-going infrastructural development and opening up of the food service sector, there is enormous scope for frozen food products.
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B&K RESEARCH
MARCH 2007
Distribution network
Self sufficient distribution base
The products of the companies are available in 60 countries worldwide, with a distribution network in 47 countries. India: The distribution network is strong consisting of 130 distributors, 500 stockists and 220,000 retailers. In Indian markets too it has arrangements with the domestic institutional clientele which consists of ITC Sheraton Hotels and many more. It also has co-promotion strategy with leading Indian companies like IOCL, Coke (India) Ltd., Duncan Tea and Sandesh Group. Rest of the world: The distribution network consists of 48 distributors, 5 stockists and 30,000 retailers. KFL also has tie-up arrangements with leading global retail chains. KFL has deployed almost around US$ 7 mn for strengthening its position in the US markets and has opened its own distribution offices at five locations in US for achieving such purpose. Major clientele The company is having a huge clientele both in the overseas market and domestic market in the form of tie-up arrangements along with some as prestigious institutional buyers.
Clients
International - TESCO, ASDA, Somerfield & Costco in UK - Wal-Mart, Krogers & Whole Foods in USA - Hankyu, Daimaru, Takshimaya and Seijo Ishi in Japan - Carrefour and Almayalal in the Middle East - Tiger Foods Brands (South Africa) - Royal Emirates (UAE) - Singapore Airlines - Malaysia Airlines Domestic Pantaloon Retail (Food Bazar) Reliance Retail Pizza Hut Spencers Amway India Taj Group of Hotels Oberoi Group of Hotels
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B&K RESEARCH
MARCH 2007
Business segment
51: Branded Basmati 4: RTE 45: Commodities
The company has food processing as its sole segment with a business mix of Branded Basmati, RTE and unbranded & commodity sales. KFL is concentrating on Branded Foods consisting of Branded Basmati and RTE. The major revenue contributors are Basmati Rice, RTE and unbranded & commodities (including non-branded rice) with contribution of 51%, 4% and 45%, respectively, in FY06. The contribution of branded basmati and RTE has increased by 7% and 130%, respectively, whereas the contribution of unbranded & commodities (including nonbranded rice) in the total sales has decreased by 11% over FY05.
Sales mix
100 80 % 60 40 20 0 FY03 FY04 FY05 Ready to Eat FY06 Other 0.0 29.3 0.9 34.1 47.1 50.6 70.7 65.0 51.1 45.3 4.1
% of branded sales
100 85 80
1.8
70 49 35 55 60
60 % 40 20 0
FY07E
FY08E
Branded Bas mati

Source: Company
Note: Others consists of unbranded & commodities (including non-branded rice).
Business mix
Mix
Branded Rice
Ready-to-Eat
Unbranded & Commodity Sales
Revenue (% of Sales)
51
45
EBITDA Margin (%) Source: B&K Research
15
20
Branded rice
Higher disposable incomes and changing taste to derive demand
Branded rice division of the company mainly comprises of branded basmati rice. Overall, it contributes 51% of the total revenue and 15% of EBITDA margin. The demand for the basmati rice is increasing due to the consumers taste and increase in their disposable income. Due to these factors a shift in the preferences is seen resulting in higher demand for the companys products in the domestic market. KFL in addition to Kohinoor has other brands, like Trophy, Charminar, Rose and Falcon severing to diverse customer base. 45
FY09E
FY04
FY05
FY06
B&K RESEARCH
MARCH 2007
Major brands and prices

Branded Basmati Rice
Kohinoor (Rs. 70/kg)

Source: Company
Trophy (Rs. 45/kg)
Charminar (Rs. 35/kg)
Falcon (Rs. 30-32/kg)
66% revenues obtained from domestic market in rice segment
The companys branded basmati sales increased by 14.7% y-o-y to Rs. 2.7 bn in FY06 compared to Rs. 2.4 bn in FY05. Out of this, 66% is obtained from domestic market and rest form export market. The domestic and export market for branded basmati rice increased by 10% to Rs. 1.8 bn and 25% to Rs. 929 mn, respectively, in FY06. With the increase in the distribution network and strong brand presence in the market, KFL expects to increase its total market share in the domestic branded basmati share from 38% to 42% by FY09. And also expects to take it to 60% in FY09 from 52% (December 2005) in the modern retail format in the domestic market.
Total branded sales

3.0 2.5 Rs in bn 2.0 1.5 1.0 0.5 0.0 FY05 FY06 Exports Domes tic Exports as a % of Branded Bas mati Domes tic Sales as % of Branded Bas mati
Source: Company
Branded basmati sales and its growth

80 66.1 33.9 60 40 % 20 0
Rs.in bn 3.0 2.5 2.0 1.5 1.0 0.5 0.0 FY03 FY04 FY05 FY06 Growth (%) 1.3 1.8 36 32 2.4 15 20 % 10 0 2.7 30 40
68.8
31.1
Branded Bas mati
Ready-to-Eat (RTE)
This segment consists mainly of ambient, frozen and chilled foods. This segment has grown at a CAGR of 111% between FY03-06
Capacity for ambient food increase from 50,000 pouches to 1 lacs pouches
The company ventured into RTE foods in FY04 in both domestic and overseas markets through ambient food. This segment has tremendous opportunities and has grown from Rs. 91 mn (FY05) to Rs. 224 mn (FY06) i.e. a rise of almost 143%. The company expects its food business to contribute 15% of its turnover by FY09, due to onset of modern retail chains in India coupled with the lifestyle change. Capacity for ambient food is 50,000 pouches at its Bahalgarh plant which is expected to increase to 1,00,000 pouches by the end of FY08. KFL has set up the frozen food facility with the capacity of 20 TPD which will further add the revenues from this division in coming years to come.
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B&K RESEARCH
MARCH 2007
Food business
Ready-to-Eat (RTE)
Ambient Food (Ventured in FY04)
Frozen food (Ventured in FY07)
Chilled Foods (Plans to enter)
- Heat & Eat Curries
Gourmet ready meals: vada, Punjabi samosas, seekh kebab, shami kebab, vegetable pakora, etc.).
- Rice Treat- Microwaveable rice - Snacks (cocktail samosas, aloo bonda, paneer tikka, idli, medu - Rice & Curry- Ready meals - Cooking Sauces - Cooking Pastes - Chutney - Spices powder - Whole spices - Seasonings
- Indian breads (aloo paratha, paneer parathas, peas parathas, plain naans, garlic butter naan, amritsari kulchas, peshawari naan, etc.). - Ready meals (Hyderabadi vegetables biryani, paneer tikka biryani, Madurai lemon rice, Chinese fried rice and soya keema biryani) - Curries (peshawari dal makhani, mutter paneer, palak paneer, mumbai pav bhaji). - Cut vegetables (all sorts of pre cut vegetables).
The company has dispatched its 1st consignment of two shipment one each to Singapore and Mauritius in the 2nd quarter of FY07. It is further expected to have shipment of frozen foods to 8-10 countries by the end of FY07.
Commodity and unbranded sales

Reduced focus on commodity segment
KFL also deals in commodity and unbranded products. The major portion includes nonbranded basmati and non-basmati rice. Company is supplying these articles to certain dealers who in turns supply the same to consumers. KFL is reducing its focus from this segment though has large contribution in the topline because it contains very low EBITDA margins of 3%. It has been reduced by 4.3% from Rs. 2.6 bn in FY05 to Rs. 2.5 bn in FY06. Commodities include pulses, namkeen, spices, wheat and flour.
Revenues from Ready-to-Eat and its growth (%)

250 200 224 Rs. Mn 150 100 50 0 FY04 FY05 Ready to Eat
Source: Company
Revenues from others and its growth

4 3.2 3 2 3.5 2.6 2.4 40 30 20 8 FY03 FY04 Other Growth FY05 -5 FY06 10 % 0 -10 -20 -25 -30
146
150 120
90
90 %
Rs in bn
60 91 48 FY06 Growth 30 0
1 0 -1 -2 -3
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B&K RESEARCH
MARCH 2007
Exports
Avaliable in more than 60 countries
KFL export revenue is around 55% amounting to Rs. 3 bn. The products of the company are available in more than 60 countries including Canada, Singapore, South Africa, UK and USA, through its distribution network. KFL forayed into new markets such as Australia, China, Iran and Japan for expanding its reach in the global markets.
Exports and exports as % of sales

3200 3150 3100 Rs. Mn 3050 3000 2950 2900 2850 2800 FY03 Exports
Source: Company
80 68 58 63 54 70 60 50 40 30 20 10 0 FY04 FY05 FY06 Export as the % of s ales %
Saudi Arabia Largest market for basmati at Rs. 30 bn
Rice: KFL has entered the key market for Indian basmati rice which is said to be Middle East (Saudi Arabia in specific) because of huge demand and higher price realisations as compared to the other markets. The export of basmati rice from India to Saudi Arabia is estimated to be around 65% of the total basmati rice exports. The market size of Indian basmati rice in Saudi Arabia is around 6 lacs tonnes valuing Rs. 30 bn. The company is also exporting its products in UK, USA, and South Africa. RTE: KFL is exporting its good of this segment to countries like UK, US, South Africa, Japan and Australia. The company is planning to setup a chilled food plant in its existing facility in UK (which has sufficient space for expansion) by FY08, as the same is expected to be one of the largest markets for chilled food. The chilled food market is expected to be 2 times bigger than that of the frozen food market which in turn is 4 times bigger than that of the ambient food market.
Planning for chilled food plant at UK
Food industry
RTE expected to post a CAGR of 22% between FY06-10
The Global Food industry is estimated to be a US$ 5 trillion market of which 80% is contributed by processed foods i.e. around Rs. 180 trillion, out of which, RTE food is estimated to be around Rs. 4.5 bn consisting of Rs. 0.5 bn, Rs. 1.6 bn and Rs. 2.4 bn for ambient, frozen and chilled food, respectively. This market is expected to post a CAGR of 22% between FY06-10 and will be around Rs. 9.9 bn. India is the 2nd largest producer of both vegetables (99 mn tonnes) and fruits (50 mn tonnes) after China and Brazil, respectively. The total Indian food retail sales and sales of microwaveable rice in UK in 2005 was around Rs. 40 bn and Rs. 4.3 bn, respectively, with the sale of microwaveable rice expected to grow further by 35% annually. The domestic market of the same is expected to be around US$ 25 mn in FY08 and Rs. 5 bn by FY09 with a CAGR of around 100% in the next three years. McKinsey has estimated the RTE market in India to post a CAGR of around 200% over the next two years. INDIAN RICE INDUSTRY THEME REPORT 48
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MARCH 2007
Future plans
KFL plans to increase it existence in 7 and 30 new countries by FY07 and FY09, respectively. It also plans to add 60 Stock Keeping Units (SKUs) from the present level of 150 SKUs by FY08 with the expansion of its capacity for ambient food to 75,000 meals per day. The company is focusing on food service and is in talks with major player for tie-up arrangements like:
Agreements
Arrangements with For Frozen Soups Papa John Emirates Flight Catering, Dubai Sauces Ambient Pastas Extension as a commissary Barista Costa Coffee Oberoi Flight Services Indian snacks for international flight catering
It is also planning to enter into new markets for further penetration in mainstream retail chains like: Morrissons, Sainsbury and Waitrose (UK). Target (UK). NETTO (Holland).
It is also in talks with large players like S&A Foods and Gazebo in UK and Sunrise in Australia for strategic tie-up.
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Financial analysis
Revenues
The net sales of the company were Rs. 5.4 bn in FY06, an increase of 7.3% over FY05. The same is expected to be around Rs. 7.5 bn by FY09E at a CAGR of 11.7% for FY06-09E. The expected revenues will be achieved on account of revenues from new geographical regions such as Saudi Arabia and from new product segment of frozen foods. Branded sales contributed almost 55% of the total revenues for FY06 as against a share of 35% in FY05. The same is expected to increase to 78% by FY09E. The CAGR growth is expected to be 25.3% between FY06-09E. Higher sales of branded products are expected on account of increase in sales from branded basmati rice and increase sales from European markets. Though, the company has reported a decline in export revenues by 6.9% at Rs. 2.9 bn for FY06 as against Rs. 3.2 bn for FY05 the same is expected to improve on account of increase in exports of branded foods consisting of basmati and frozen foods. It is expected that the contributions from export will be around 72% by FY09E. The decline in export revenues was on account of shift in focus from commodity business to branded food business. The commodity business contributed the maximum sales in the total revenues of the company until FY05.
Turnover and Growth

9000 7000 Rs. Mn 5000 3000 1000 -1000 FY07E FY08E FY02 FY03 FY04 FY05 FY06 6 30 33 17 -5 33 20 7 22 11 12 35 80 70 60 50 40 20 30 20 12 10 0 -10 FY09E
Exports and % of sales for exports

8000 7000 6000 5000 4000 3000 2000 1000 0 62 68 58 63 55 60 67 72 80 70 60 50 40 30 20 10 0 FY09E
Rs. Mn
FY07E
Turnover Unbranded Growth (Branded)

Source: Company
Branded Growth (Turnover)
Exports Domes tic Export as the % of s ales
Margins
The EBITDA margin of the company increased from 6.5% in FY05 to 8% in FY06 on account of favourable product mix shift and is expected to be 10.4% by FY09E. The net profit increased from Rs. 155 mn in FY05 to Rs. 208 mn in FY06, a growth of 34.4% on account of increase in branded business. The growth in CAGR between FY06-09E is expected to be 22%. The net margin increased from 3.1% in FY05 to 3.9% in FY06 and is further expected to improve to 5% by FY09E.
FY08E
FY02
FY03
FY04
FY05
FY06
50
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MARCH 2007
Investor returns
The reported EPS for FY06 was Rs. 10.6 as against an EPS of Rs. 7.9 for FY05. The EPS for FY09E is expected to be Rs. 12.8. CAGR in EPS between FY06-09E is expected to be 6%. The RoE has increased by 310 bps from 15.4% in FY05 to 18.5% in FY06 and is further expected to improve to 14.3% by FY09E.
EBITDA and PAT margins

12 10 8 6 4 2 0 FY07E FY08E FY09E FY02 FY03 FY04 FY05 FY06 2.1 % 6.5 5.8 2.1 5.9 2.4 6.5 3.1 3.9 4.5 8.0 9.6 10.1 10.4
EPS and DPS

16 14 12 Per share 4.9 5.0 10 8 6 4 2 0 FY07E FY08E FY09E FY02 FY03 FY04 FY05 FY06 0.0 3.8 6.6 4.8 1.0 1.5 2.0 2.2 2.5 3.0 Dividend EPS 7.9 3.5 10.6 13.8 11.0 12.8
EBITDA Margins
Source: Company
PAT Margins

(Rs. mn) Net Sales EBITDA EBITDA Margins (%) Other Income Interest Depreciation PBT Tax Adjusted PAT PAT Margins (%) EPS (Rs.) 3QFY06 1,404 136 9.7 9 (52) (30) 62 (8) 55 3.9 2.8 3QFY07 1,816 186 9.7 5 (55) (30) 105 (25) 80 4.2 4.1 YoY (%) 29.3 36.9 (43.3) 6.1 0.0 68.6 233.3 46.2 9MFY06 3,344 354 10.6 17 (112) (60) 199 (33) 167 5.0 8.5 9MFY07 4,142 422 9.6 17 (140) (73) 226 (48) 178 4.0 9.1 YoY (%) 23.9 19.2 (1.2) 25.4 20.8 13.5 46.2 7.1
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Detailed financials
Income Statement
(Rs. mn) Net sales Growth (%) Operating expenses % to net sales Raw material cost RM as % of cost RM as % of Net sales FY03 4534 29.6 4273 30.6 3438 80.5 75.8 FY04 5316 17.2 5004 17.1 4165 83.2 78.4 158 3.0 53 1.0 62 1.2 384 7.2 92 1.7 91 1.7 311 5.9 52 35 295 121 174 174 45 130 2.4 FY05 5036 (5.3) 4708 (5.9) 3926 83.4 78.0 159 3.2 61 1.2 69 1.4 301 6.0 94 1.9 98 1.9 328 6.5 58 46 316 101 215 215 60 155 3.1 FY06 5399 7.2 4966 5.5 4055 81.6 75.1 198 3.7 86 1.6 72 1.3 355 6.6 103 1.9 97 1.8 433 8.0 83 29 379 102 277 277 69 208 3.9 FY07E 6011 11.3 5436 9.5 4403 81.0 73.2 217 3.6 120 2.0 72 1.2 391 6.5 120 2.0 113 1.9 575 9.6 105 25 495 133 361 361 92 270 4.5 FY08E 6712 11.7 6037 11.1 4834 80.1 72.0 251 3.7 134 2.0 81 1.2 470 7.0 134 2.0 134 2.0 675 10.1 142 21 553 113 440 440 113 327 4.9 FY09E 7515 12.0 6737 11.6 5298 78.6 70.5 312 4.1 158 2.1 94 1.3 571 7.6 150 2.0 154 2.1 778 10.4 164 16 630 125 505 505 127 377 5.0
Packing material consumed 140 % of Net Sales Employee expenses % of Net Sales Power & Fuel % of Net Sales 3.1 44 1.0 52 1.2
Selling & Distribution exp. 347 % of Net Sales Administrative expenses % of Net Sales Other expenses % of Net Sales EBITDA EBITDA Margin (%) Depreciation Other income EBIT Interest paid Pre-tax profit (before non-recurring items) Pre-tax profit (after non-recurring items) Tax (current + deferred) Net profit PAT Margin (%) 16 95 2.1 111 7.7 67 1.5 185 4.1 261 5.8 42 55 274 163 111
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Balance Sheet
(Rs. mn) Current assets Investments Net fixed assets Total assets Current liabilities Total Debt - Short term - Long term FY03 3054 65 341 3461 149 2440 53 2387 FY04 3068 65 404 3537 233 2327 19 2308 31 2592 196 754 754 (4) 945 3537 3303 FY05 3656 129 447 4232 471 2665 18 2647 37 3172 196 864 864 0 1060 4232 3761 FY06 4479 207 568 5254 488 3553 30 3523 30 4070 196 1023 1023 (35) 1184 5254 4767 FY07E 4801 207 565 5573 583 3556 35 3521 25 4164 196 1241 1241 (28) 1410 5573 4991 FY08E 5344 207 724 6274 765 2982 38 2945 23 3770 296 2229 2229 (21) 2504 6274 5509 FY09E 6116 207 616 6939 880 3270 40 3230 20 4170 296 2490 2490 (17) 2769 6939 6059
Other non-current liabilities 27 Total liabilities Share capital Reserves & surplus - Retained Earnings Less: Misc. expenditure Shareholders funds 2616 196 657 657 (8) 845
Total equity & liabilities 3461 Capital employed 3311
Cash Flow Statement

(Rs. mn) Pre-tax profit Depreciation Chg in working capital Total tax paid FY03 111 41 (523) 0 FY04 174 46 34 0 254 (108) 0 (0) (108) 146 4 (113) (22) (131) 15 FY05 215 48 (432) 0 (170) (91) (64) 0 (155) (325) 4 338 (33) 309 (16) FY06 277 70 (616) 0 (269) (190) (77) (0) (268) (537) (35) 888 (45) 809 272 FY07E 361 93 (469) (47) (61) (90) 0 5 (85) (147) 7 3 (49) (39) (186) FY08E 440 132 (501) (51) 21 (290) 0 12 (278) (257) 857 (574) (56) 227 (30) FY09E 505 155 (793) (88) (222) (47) 0 2 (45) (267) 3 287 (101) 190 (77)
Cash flow from oper. (a) (370) Capital expenditure Chg in investments Other investing activities (100) (13) (0)
Cash flow from inv. (b) (113) Free cash flow (a+b) Equity raised/(repaid) Debt raised/(repaid) Dividend (incl. tax) (483) 4 487 (7)
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Kohinoor Foods
Income Statement
Yr ended 31 Mar (Rs. mn) FY06 . . Net sales Growth (%) Operating expenses Operating profit EBITDA Growth (%) Depreciation Other income EBIT Interest paid Pre-tax profit (before non-recurring items) Pre-tax profit (after non-recurring items) Tax (current + deferred) Net profit Adjusted net profit Growth (%) Net income (69) 208 208 34.4 208 (92) 270 270 29.7 270 (113) 327 327 21.1 327 (127) 377 377 15.5 377 277 361 440 505 5,399 7.2 (4,966) 433 433 32.0 (83) 29 379 (102) 277 FY07E 6,011 11.3 (5,436) 575 575 32.7 (105) 25 495 (133) 361 FY08E 6,712 11.7 (6,037) 675 675 17.3 (142) 21 553 (113) 440 FY09E 7,515 12.0 (6,737) 778 778 15.3 (164) 16 630 (125) 505
Cash Flow Statement

Yr ended 31 Mar (Rs. mn) FY06 . . Pre-tax profit 277 Depreciation 70 Chg in working capital (616) Total tax paid 0 Other operating activities Cash flow from oper. (a)(269) Capital expenditure (190) Chg in investments (77) Other investing activities 0 Cash flow from inv. (b) (268) Free cash flow (a+b) (537) Equity raised/(repaid) (35) Debt raised/(repaid) 888 Dividend (incl. tax) (45) Cash flow from fin. (c) 809 Net chg in cash (a+b+c) 272 FY07E 361 93 (469) (47) (61) (90) 5 (85) (147) 7 3 (49) (39) (186) FY08E 440 132 (501) (51) 21 (290) 12 (278) (257) 857 (574) (56) 227 (30) FY09E 505 155 (793) (88) (222) (47) 2 (45) (267) 3 287 (101) 190 (77)
Key Ratios
Yr. ended 31 Mar. (%) FY06 EPS (Rs.) EPS growth EBITDA margin EBIT margin ROCE Net debt/Equity 10.6 34.4 8.0 7.0 8.9 273.9 FY07E 13.8 29.7 9.6 8.2 10.1 243.4 FY08E 11.0 (19.8) 10.1 8.2 10.5 115.3 FY09E 12.8 15.5 10.4 8.4 10.9 117.4
Balance Sheet
Yr ended 31 Mar (Rs. mn) FY06 . . Current assets Investments Net fixed assets Total assets Current liabilities Total Debt Total liabilities Share capital Reserves & surplus Less: Misc. expenditure Shareholders funds Capital Empolyed 4,479 207 568 5,254 488 3,553 4,070 196 1,023 (35) 1,184 4,767 FY07E 4,801 207 565 5,573 583 3,556 25 4,164 196 1,241 (28) 1,410 5,573 4,991 FY08E 5,344 207 724 6,274 765 2,982 23 3,770 296 2,229 (21) 2,504 6,274 5,509 FY09E 6,116 207 616 6,939 880 3,270 20 4,170 296 2,490 (17) 2,769 6,939 6,059
Valuations
Other non-current liabilities 30

Yr. ended 31 Mar. (x) Net margin (%) Asset turnover Leverage factor Return on equity (%) FY06 3.9 1.1 4.2 18.5 FY07E 4.5 1.1 4.2 20.8 FY08E 4.9 1.1 3.0 16.7 FY09E 5.0 1.1 2.5 14.3
Total equity & liabilities 5,254
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Share Data
Mkt. Cap. Price Target Price BSE Sensex Reuters Bloomberg Daily Volume 52-week High/Low Issued Shares Rs. 8.6 bn (US$ 196 mn) Rs. 193 Rs. 145 12886 REAG.BO REIA IN US$ 2.6 mn (Rs. 115.1 mn) Rs. 216/59 45 mn
REI Agro
Cultivating brands
Sell
REI Agro has emerged as the leading basmati rice processor in India and is enhancing its capacities to cater the growing demands in the market, particularly from modern retail stores and exports. Its product range varies from premium to popular to mass consumption products. The company is taking active steps to increase market share through branding and marketing exercises. We are initiating coverage with a Sell in the light of expensive valuations.
Year to March P&L data (Rs. mn) Net Sales Operating Profit EBITDA Net Profit Margins (%) Operating Profit EBITDA Net Profit Balance Sheet Data (Rs. mn) Total Assets Shareholders Funds Per Share Data (Rs.) EPS CEPS Dividend Returns (%) RoE RoCE 26.8 15.3 17.2 13.1 15.2 13.0 15.8 13.5 11,790 3,259 17.0 19.4 2.3 14,304 4,790 15.5 18.8 2.5 16,382 5,883 17.0 20.9 2.8 19,217 6,730 21.0 26.2 2.8 17.7 27.3 7.3 10.5 6.5 14.2 15.5 7.0 15.3 18.5 7.4 15.6 19.0 7.5 15.8 19.7 8.0 9,440 1,340 1,487 660 9,315 1,428 1,793 694 10,713 1,671 2,114 809 12,476 1,971 2,584 997 FY06 FY07E FY08E FY09E CAGR (%) (FY06-09E) 9.7 13.7 20.2 14.7
Valuation Ratios
Year to 31 Mar. 2008E 2009E EPS (Rs.) +/- (%) PER (x) PBV (x) Dividend/Yield (%) EV/Sales (x) EV/EBITDA (x) 17.0 9.9 11.3 1.6 1.4 1.6 8.2 21.0 23.4 9.2 1.4 1.4 1.5 7.3

Promoters FIIs ADRs/GDRs/Other Foreign Institutions Public & Others 43 8 12 5 32
400 300 200 100 0 Sep-05 May-05 Mar-07 Dec-04 Feb-06 Jun-06 Nov-06
The company is now focusing more on branding of its own products as compared to trading the products. The company products are available in the range of Rs. 7-77/ kg for mass, popular and premium segments. With an expansion of business portfolio in the retail segment, the company expects to increase its topline and improve margins. It plans to start with presence of retail chains in the NCR region before moving to a pan-India reach. At the current market price of Rs. 193, the stock is trading at 12.5x FY07E, 11.3x FY08E and 9.2x FY09E earnings. We believe the stock is expensive and the fair value at 8.5x FY08E EPS of Rs. 17 should be Rs. 145. We initiate coverage with a Sell.
REI Agro (Actual) Sens ex
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MARCH 2007
REI Agro has achieved the leadership position in the rice industry in a short span of time. Since its inception it has been a dividend paying company and has therefore given its investors, an adequate return on their investments along with capital appreciation.
Overall growth
Business mix complement each other The diversification into wind energy will help the company to de-risk its dependence on a single business of basmati rice. Wind farms not only contribute to the bottomline but generate free cash flows that can be used for working capital requirement in basmati rice business thus, improving the operating margin of the company. Wind Energy generation is a stable business, requiring no fuel; also the cost of the plant is frozen at the time of the project commissioning, secured by the power purchase agreement even before actual sales. This is exactly the same in basmati rice business, which also enjoys stable paddy prices. Both businesses are fragmented with the a few large and focused players. Shift from unorganised to organised There is a continuous shift of market share from unorganised to organised players as these big players offer quality products at affordable prices. This trend is expected to benefit the company in the form of increased revenues.
De-risking the porfolio
Basmati rice growth

Capacity expansion REI has total production capacities of 61 TPH and 32 TPH for basmati and parboiled rice, respectively, in Bawal (Haryana). The capacity utilisation of the plant is expected to be 74% and 76% by the end of FY07E and FY08E, respectively. The company has utilised 73% of the total capacity in FY06. This huge scale of operations would further strengthen REIs competitive advantage through increased economies of scale. The company is planning to have a total capacity of 90 TPH by FY09. Second largest processor of basmati rice REI processes 61 TPH of basmati rice, making it the second largest processor after KRBL (81 TPH). It captures 20% of the total basmati rice market in terms of sales and processes 14% of total production in India. REI is further expected to maintain such position mainly on account of the huge demand of the branded basmati rice both in domestic and export markets. Among the 4 major organised players (Kohinoor Foods, KRBL, Lakshmi Energy and REI), REIs revenues are the highest.
Planning to increase the capacity from 61 TPH to 90 TPH by FY09
2nd to KRBL in terms of capacity
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Comparative sales
100% 80% 60% 40% 20% 0% FY03 Kohinoor Foods FY04 KRBL FY05 Laks hmi Energy FY06 REI Agro 4975 1251 5895 6027 2251 4754 5316 8450 4077 5027 5036 9588 5603 7248 5411
4534
Source: Company
Focusing on the branded segment The company is focusing on high margin branded rice segment. REI Agro initially embarked upon a low-cost approach in this regards and targeted the mass and popular market segments in the first leg. The companys contribution from branded sales is expected to go up to 48% by FY09E. Economy segments have the brands like Hansraj & Raindrop followed by the Mr. Miller & Hungama in midrange and Kasauti & Real Magic in premium segment. The product portfolio consists of broken, branded, unbranded and parboiled rice at the selling prices of Rs. 19, Rs. 46, Rs. 44 and Rs. 23/kg, respectively.
Targeting on all the segments of the society
Parboiled rice milling to boost exports realisation The company commissioned one of Indias largest parboiling facility in January 2005 in Haryana with an aggregate capacity of 230,000 TPA. Parboiled rice has a huge demand in the Middle East markets. It contributed 10% of the exports revenue in FY06. Export market contributed around 15% of the total revenue in FY06 which grew by 42% from Rs. 838 mn in FY05 to Rs. 1,443 mn in FY06 and is further expected to grow to 30% in FY09. The yield or recovery rate from parboiled rice is high at around 61% as compared to raw rice which yields only 44% of the total paddy. This high recovery rate ultimately contributes in the form of improved bottomline even though the realisations may be lower.
Parboiled rice has huge potential in export market
Export sales
FY06 FY09E
70%
85%
15%
30%
Domes tic Exports
Source: Company
57
B&K RESEARCH Yield enhancement
MARCH 2007
The company has been able to control proportion of broken rice, thereby increasing full rice recovery. Full rice is sold in the market at a premium of nearly 100 % over broken rice. The company has increased the ageing period from 5.8 months in FY05 to 8.1 months in FY06, which resulted in an improvement in the yield of rice from 39% in FY05 to 44% in FY06 and would further increase up to 54% by FY09. REI has an expertise in purchasing the right quality paddy and ageing it for the desired period (expects to increase it to 14 months in the coming years). The company is making deliberate effort to reduce the distributors role in ageing of basmati; the entire ageing cycle would be done by the company. The increase in the ageing period from 8 to 14 months needs high inventory level and additional working capital requirement. It becomes positive for the company, as it has the ability to raise working capital loans cheaper than its distributors and hence, benefit from such initiative.
Ageing improves the quality and realisation of rice
Yield enhancement
60 50 40 30 20 10 0 FY07E FY08E FY09E FY03 FY04 FY05 FY06 % 31 36 39 44 48 52 54
Yield of wholegrain rice (%)

Source: Company
Power generation growth

Wind farm business Wind energy business hold immense potential in India, as it is the cheapest source of power. Wind energy is a free and renewable energy resource and has low gestation period of mere three-six months compared to gestation period of a couple of years for a thermal power plant. REI has the total installed capacity of 35.9 MW and plans to install another 10 MW plant in March 2007 in Gujarat with the capex of Rs. 550 mn. Operating margin from the wind energy business was 85% in FY05 and 95% in FY06 with the further expansion in the wind farm these levels will continue to remain the same. The units generated from the wind farm fetch carbon credit and 50,000 Certified Emission Reduction (CER) have been credited to the Rajasthan plant and the same for Maharashtra plant has been initiated. Wind farms also give the advantage of depreciation claims and income tax benefits on income generated from the business. The company hasnt accounted for CER credits as intangible assets in its books as it plans to book the same on cash basis. The CER rate is expected to improve drastically in the future. 58
Total installed capacity of 35.9 MW
B&K RESEARCH
MARCH 2007
Other strengths
Distribution network REIs distribution network involves 435 distributors and retail reach of over 1 lac outlets. The companys efforts to reduce dependence on select channels and thereby reducing risk of concentrated sales. The company has tied up with 3 large trading houses (Baba Kher, Al-Muhaidi and Umar-Kasam) in Middle East which consumes 65% of Indias basmati exports.
Focusing on strengthening the distribution network
Distribution breakup Region-wise

Region North South East & Central West Total FY03 192 27 23 62 304 FY04 204 31 27 70 332 FY05 230 38 30 92 390 FY06 206 53 44 132 435
Region-wise Sales
26%
Distributors
30%
48%
53% 13%
North Wes t Eas t
12% 10%
8%
Source: Company
South
Preferred buyer status REI enjoys presence in 130 organised government-controlled grain markets (mandis) in India out of a total of 200 in the basmati belt (northern India) through its trained middlemen (pukka atriyas). This enables it to monitor paddy quality and prices. It purchases large quantities of paddy and makes upfront payment. This grants the preferred buyer status to the company.
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Procurement of raw material

500000 400000 300000 200000 100000 0 FY03 FY04 FY05 FY06 Off-s eas on Peak s eas on
Source: Company
MT
Subsidiary formation The company intends to set up two 100% subsidiary companies namely REI Retail Limited and REI Foods And Beverages Limited. REI Retail Limited would focus on the market currently being addressed by Indias unorganised retail sector by setting up neighbourhood convenience stores having an area of around 2,000 sq.ft. each across North India in FY07. Through REI Foods And Beverages Limited, the company plans to acquire assets of a reputed juice manufacturer based in Western India, to enter the growing food and beverages sector which would also complement its retail business which is in the pipeline.
Going into retail with its own subsidiary
Investment concerns
Working capital intensive
REI has increased the ageing period of inventory to improve the quality of its products which has resulted in higher working capital requirement. The company has to therefore take higher financial leverage to meet its huge working capital requirement resulting into higher finance cost having a negative impact on the bottomline of the company.
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Valuations
The company is progressing towards strong growth due to the following factors: Shift towards basmati rice: The demand for the basmati rice is increasing due to increase in the disposable incomes, changing consumers preferences and demand for premium products, which will ultimately have positive impact on the companys basmati rice sales. Growth prospects in exports: India is the worlds largest exporter of basmati rice. Middle East remains the major export market for Indian basmati rice and within it, Saudi Arabia accounts for the major chunk of imports from India. REI has entered the export market with parboiled rice which has high demand in the Middle East because of its nutritive values. Wind farm: The company is also concentrating in the Wind Energy business which has high growth prospective. The cost of wind power generation is the lowest among both renewable and non-renewable power generation source. Revenue has grown by 230% from Rs. 63 mn in FY05 to Rs. 147 mn in FY06. REI is looking forward to invest heavily in wind farm in the coming years as it generates high return.
PER Band
300 250 200 150 100 50 0 Sep-04 Sep-05 Mar-05 Mar-06 Sep-06 May-05 May-06 Mar-07 Jul-04 Jul-05 Jan-05 Jan-06 Jul-06 Jun-04 Nov-04 Nov-05 Nov-06 Apr-04 Jan-07
15.2x 13.1x 10.9x 8.8x 6.7x
At the current market price of Rs. 193, the stock is trading at 12.5x FY07E, 11.3x FY08E and 9.2x FY09E earnings. We believe the stock is expensive and the fair value at 8.5x FY08E EPS of Rs. 17 should be Rs. 145. We initiate coverage with a Sell.
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Business overview
Background
Largest parboiling plant in India
REI Agro Limited was established in 1994 by Mr. Sanjay Jhunjhunwala and Mr. Sandip Jhunjhunwala and became public limited company in 1996. The company has emerged as the leading basmati rice processor and captures 20% total basmati rice market. With the public issue company had started its first rice grading unit at Bawal with a capacity of 73,920 TPA and went into backward integration as rice miller in 1998. REI started branding of broken rice in 2001 with the brands like Masti and Maaza for mass segment. In 2004, the company set up its first wind farm in Rajasthan with the capacity of 7.5 MW, through which the company diversified its product portfolio. It set up a wind farm in Maharashtra with 15.8 MW and augmented it to 22.4 MW. The company has constructed one of the largest parboiling plants in India with the total capacity of 32 TPH. With the modest beginning, the company has become the largest processor in the industry in a short span of 12 years with a total installed milling capacity of 49 TPH which increased to 61 TPH in September 2006.
Success path
Phase (Years) I 1994-96 Events III 2002-04 IV 2004-06 V - 2006 & beyond Incorporation Rice Grading Unit (Bawal) IPO Backward integration to rice milling Capacity expansion Branding of Broken Rice Capacity expansion Bonus issue Emerged as the largest processor in the world Introduced products in different segment Wind farm in Rajasthan Parboiled facility Wind farm in Maharashtra FCCB issue Expansion of wind farm capacity in Maharashtra GDR issue 9.9 MW US$ 30.2 mn 7.5 MW 0.24 mn tonnes/annum 12.5 MW US$ 32.2 mn Branded Products 12 TPH 1:1 For Basmati Rice 15 TPH Conclusion 10 TPH Rs. 72.5 mn
II 1996-02
Expansion of milling capacity 24 TPH {12TPH each in Feb & Sep. 06} Capacity in Tamil Nadu 6 MW
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Management
Mr. Sanjay Jhunjhunwala, CMD is the promoter of the company, largely responsible for its growth in operations since inception and also being the driving force behind building the export market. Mr. Sundip Jhunjhunwala, Vice-Chairman and Managing Director, is the co-promoter of the company. He oversees the overall operational activities.

Duration Issued Increase capital 1996 4.4 4.5 02-03 03-04 04-05 05-06 14.8 29.6 33.4 38.8 0.1 10.3 14.8 3.8 5.4 Face value (Rs.) 10.0 10.0 10.0 10.0 10.0 10.0 Issued to government institutions. Public issue. Bonus issue in the ratio of 1:1. Preferential issue. Issue of 7.5 mn equity shares against 3.8 mn GDRs. FCCB conversion 1.7 mn. Cancellation of 3.8 mn shares. 06-07 44.8 6.0 10.0 Conversion of FCCB. Particulars
Business segment
REI has two business segments: 1. Rice processing. 2. Wind farm.
Business segments
REI Agro
Complementing business segments
Basmati Rice Processing (98.5% of Sales)
Wind Mill Power (1.5% of Sales)
Branded Rice (35% of sales) Source: Company
Unbranded Rice (50% of sales)
Export (15% of sales)
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Capacity allocation
Ongoing expansion in windpower generation
Rice: REI has a manufacturing plant for rice processing in Bawal (Haryana) with a capacity of 61 TPH for basmati rice and 32 MTPH for parboiled rice. Wind power: The company has 3 plants in wind farm generation. It has already installed the 35.9 MW capacity with total capex of Rs. 2 bn approximately. The company is presently installing another 10 MW in Gujarat.
Manufacturing facilities
Location Bawal, Haryana Jaisalmer, Rajasthan Dhule, Maharashtra Tamil Nadu Nature Rice processing Wind farm Wind farm Wind farm Installed capacity 61 TPH 7.5 MW 22.4 MW 6 MW
Historical performance
The companys topline and EBITDA has grown at a CAGR of 25% and 55.7%, respectively, for the period FY02-06. The major growth factors have been increased concentration on the branded basmati and low operational cost in wind power generation. Bottomline CAGR of the company was 76.3% for the same period.
Annually
10,000 8,000 Rs. Mn 6,000 6.5 4,000 2,000 0 FY02 FY03 Turnover
Source: Company
9 Months
15.8 10.4 6.3 6.5 18 16 14 12 10 8 6 4 2 0
8,000 7,000 6,000 Rs. Mn 5,000 4,000 3,000 2,000 1,000 0 9M FY04 9M FY05 9M FY06 7.5
%
20.8 14.5 10.6
24 20 16 12 8 4 0 %
FY04
FY05
FY06
9M FY07
EBITDA (%)
Turnover
EBITDA Margin (%)
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Business segments
REI has two segments Rice (a part of food processing industry) and Wind Power Generation.
Rice
The company mainly deals in branded basmati rice. Rice contributed almost 98.5% in the total revenues of the company and has grown with a CAGR of 23% between FY03-06. Branded rice, unbranded rice and exports have grown with a CAGR of 61%, 5% and 97%, respectively, between FY03-06. With the further expansion in the production capacity from 49 TPH to 61 TPH at Bawal unit, it will further contribute to the topline. REI has the 32 TPH of capacity for parboiled rice mainly for export purpose. Parboiled rice has a good demand in Saudi Arabia and other gulf countries because of its nutritive value. It grew with a CAGR of 184% between FY02-06 and contributed 15% of the total sales in FY06.
Exports
Future in exports
REI has largest facility for parboiled rice. The company has registered significant growth in the export market due to the huge demand for parboiled rice which is expected to increase further. The contribution of parboiled rice and Mr. Miller (a popular brand) in the exports stands around 10% and 5%, respectively. Its export market mainly consists of Saudi Arabia, Dubai, USA and European Union.
Rice Growth (%)

10000 8000 6022 Rs. Mn 6000 4000 2000 0 FY02 FY03 FY04 FY05 FY06 2076 4972 39.2 21.1 12.6 139.5 8385 9440 150 120
Export and exports % of sales

1600 1400 1200 1000 800 600 400 200 0 15.1 9.9 1443 838 243 FY04 FY05 FY06 18 15 12 9 6 3 0 %
60 30 0
Rs Mn
90 %
3.7 0.6 22 FY02 182 FY03
4.0
Proces s ed Rice
Source: Company
Growth (%)
Exports
% of Sales
Product range
REI Agro Limited has entered the branded market in the year 2001. The company had strategically decided to enter the branding space with the launch of branded broken rice. In fact, the company was the first to start branding of broken rice for the mass brands. It started branding of whole grain in the year 2004. Premium rice (Kasauti, Real Magic) represents the highest quality of rice followed by the popular brands. REI has product range according to the purchasing power and preference of the consumer. This helps the company to improve both its revenue and margins. The companys products are available from Rs. 7 to Rs. 77/ kg, while packs are available in sizes ranging from 100 gm to 50 kgs. INDIAN RICE INDUSTRY THEME REPORT 65
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MARCH 2007 The quality of the premium rice is better than that of the popular variety in terms of: Longer grain. Higher ageing/maturity of the grain.
Brand portfolio (FY06)

Segments Brand name Launch date Retail price (Rs./kg) Premium Kasauti Real Magic Popular Mr. Miller Hungama Mass Hansraj Masti Maaza
*Depending on the size of grain. Source: Company
Sales mix
70 60 50 40 30 20 10 0 Premium Popular Mas s 5 10 34 % 29 Market s hare REI s ales 61 61
Dec. 04 Nov. 04 Apr. 04 Apr. 04 Dec. 04 Apr. 01 Apr. 01
77 70 62 55 50 7-25* 7-25*
REI Argos brand portfolio comprises of Premium, Popular and Mass brands. In Indian market, the consumption pattern for different categories of branded basmati constitutes of 5%, 34%, and 61% in favour of premium, popular and mass brands, respectively. The companys presence can be felt at all the levels of consumption behaviours, due to its superior quality and competitive price range. The proportion of REIs premium segment sales is 10% which is much higher than that of the overall market at 5%.
Wind farm business

REI has diversified its portfolio from its existing rice processing business in FY04 through the commissioning of wind power generation in Rajasthan and Maharashtra. The company has a total capacity of 35.9 MW with 7.5 MW, 22.4 MW and 6 MW power generation capacities in Jaisalmer (Rajasthan), Dhule (Maharashtra) and Tamil Nadu, respectively. It contributed Rs. 147 mn in other operating income in FY06 which grew by 133% over Rs. 63 mn in FY05. Operating margin from the wind energy business was 85% in FY05 and 95% in FY06. REI is further expanding its capacity of wind farm by 10 MW in FY07 at a total capex of approximately Rs. 550 mn. The company has extensive plans in wind farm. It plans to increase the installed capacity by 10 MW each year which would drive the growth in margins. The realisation from the power plant is expected to meet the high working capital requirement of rice-processing operations. Though, requiring a huge initial capital outlay, such facility involves only a nominal working capital for its day-to-day operations and is a source of consistent fast cash inflows.
Cash flows from wind farm business to help meet the working capital requirment
Selling agreements
State specific agreement
The company has signed a Power Purchase Agreements (PPA) with the Maharashtra Electricity Development Authority (MEDA) for 13 years from the time of commencement of the project. The rate is Rs. 3.5/KWH with the escalation rate of 15 paisa per unit hike for subsequent years to come. The tariff structure in Rajasthan under PPA is Rs. 3.32/ 66
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MARCH 2007 KWH for the base year in FY05 with a 2% increase per KWH every year on the base year up to 10th year, after this the tariff for remaining 10 years is the 10th year rate. The tariff rate from Tamil Nadu government is Rs. 3.5/KWH.
Major benefits from wind powers project

Tax-free profits
REI is eligible for 100% tax exemption on the revenue earned from the wind farm business. This exemption will be for a period of 15 years of operations, with the company having the choice to select any 10 consecutive years. The company has received a depreciation benefit of 80% of the entire costs of the project in the very first year and remaining 20% can be claimed in the next year for computation of taxable income. It is not only for the wind farm business but entity as a whole, thereby, reducing the tax on the profits earned out of the rice business also. With the combination of above two benefits, the company is able to reduce taxable profits by enhanced depreciation and thus take the advantage of the tax-free benefits.
Accelerated depreciation
Wind power capacity, December 2005 (Global)

Country Germany Spain US India Denmark Total MW 18,428 10,027 9,149 4,430 3,122 59,084 % share 32 17 16 8 5
Wind power industry

Wind power generation has a tremendous potential for growth in India on account of short gestation period of three-six months for installing wind farm as compared to a larger gestation period for a thermal power plant. It involves higher capital expenditure in the form of cost of land and equipments, were as the operational cost is nominal as it does not require fuel. This form of power generation is pollution free and made available at the cheapest cost as compared to other sources of power generation. The demand-supply gap for power is currently estimated to be around 40,000 MW and the Central Electricity Authority (CEA) has projected a demand of about 240,000 MW by 2012. As compared to demand, the total capacity is only at 125,000 MW presently; which is expected to augment by at least 10,000 MW per year. With the government initiating the power sector reforms a few years back notably the Electricity Act 2003, there has been a transformation of power sector into competitive market from the traditional monopoly market. Capacity expansion is imperative in the scenario of a constantly increasing demandsupply gap. The power projects are becoming unviable mainly due to the rising prices of depleting reserves of non-renewable fuels such as oils & natural gas. The Indian government is encouraging the generation of wind farm power projects, by providing significant tax incentives to the companies willing to venture into such projects. As a result, India has emerged as one of the top 5 generators of wind power with around 8% of global market.
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Financials
Revenues and earning
REI is expected to post a CAGR of 9.7%, 20.2% and 14.7% for the revenues, EBITDA and PAT, respectively, between FY06-09E. The major factor that has improved the margins is the addition of wind farm into the business which requires a low operational cost and generates high revenue realisation. The company has discontinued the trading business in current year which has contributed approximately Rs. 1.6 bn in revenues in FY06. This would impact the topline in FY07E and it will not show a similar growth. Branded rice portion in terms of sales will further increase which ultimately would improve the EBITDA and PAT levels.
Turnover and Growth

14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 -2,000 FY02 70 60 50 40 30 20 10 0 -10
Operating and Net margins

25 20 % 15 10 5 0 FY02 7 7 2 6 6 2 FY03 FY04 7 7 3 5 FY05 10 10 7 FY06 7 FY07E 8 FY08E 8 FY09E 16 14 15 16 16 19 19 20
39 29 21 13 -1 15 16
Rs. Mn
FY07E
FY08E
FY09E
FY03
FY04
FY05
FY06
Turnover
Source: Company
Growth
Operating Margin(%) PAT Margin (%)
EBIDTA Margin (%)
Raw material costs

The major component for rice processing is paddy, and the prices of this largely depend upon the climate conditions of the region. Commodity players have to cope up with raw material prices as they are usually unable to pass on the price changes to the end consumer. Due to larger scale and size, the company has enabled itself to collect a large quantity of quality paddy during the peak season to take the price advantage.
Raw material cost to sales

12,000 10,000 Rs. Mn 8,000 6,000 4,000 2,000 0 FY07E FY08E FY09E FY02 FY03 FY04 FY05 FY06 89.8 89.9 89.3 84.2 79.3 77.7 77.4 77.1 100 80 60 40 20 0 % Raw material cos t
Source: Company
as % of s ales
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Enhanced branding
Branded rice sale of the company has increased significantly by 77% from Rs. 1.9 bn in FY05 to Rs. 3.4 bn in FY06. The share of branded rice in total revenues was around 36% in FY06 is expected to improve further to 44% and 48% in FY08E and FY09E, respectively. The margins and average realisation from the rice is expected to rise on account of increase in sales of branded products.
Branded sales
20,000 15,000 Rs. Mn 10,000 5,000 0 FY07E FY08E FY09E FY03 FY04 FY05 FY06 27.0 16.1 22.6 35.6 40.0 44.0 48.0 60 50 40 30 20 10 0 %
Total revenue
Source: Company
Branded rice
% of branded rice

(Rs. mn) Net Sales Operating Expenses Operating Margins (%) Other operating income EBITDA EBITDA Margins (%) Other Income Interest Depreciation PBT Tax Adjusted PAT PAT Margins (%) EPS (Rs.) 3QFY06 1646 1284 21.9 2 363 20.9 0 (74) (24) 265 (85) 180 10.9 4 3QFY07 2317 1798 22.4 90 609 25.3 0 (188) (37) 384 (131) 253 10.5 6* YoY (%) 40.8 40.0 4235.2 67.6 (100.0) 155.2 52.7 44.6 53.5 40.5 9MFY06 7339 6342 13.6 84 1082 14.6 1 (258) (67) 758 (245) 513 7.0 13 9MFY07 6896 5675 17.7 268 1489 21.3 0 (446) (114) 929 (315) 614 8.6 14* YoY (%) (6.0) (10.5) 218.4 37.6 (86.3) 72.7 70.1 22.5 28.5 19.7
*On diluted capital of 44.8 mn shares.
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Detailed financials
Income Statement
(Rs. mn) Net sales Growth (%) Operating expenses % to net sales Raw material cost RM as % of cost RM as % of Net sales % of Net Sales Employee expenses % of Net Sales Power & Fuel % of Net Sales Selling & Distribution exp. % of Net Sales Administrative expenses % of Net Sales Other expenses % of Net Sales Operating income Operating Margin (%) Other Operating income (Wind farm) EBITDA EBITDA Margin (%) Depreciation Other income EBIT Interest paid FY03 4975 28.7 4659 93.7 4342 93.2 87.3 2.6 46 0.9 33 0.7 60 1.2 16 0.3 34 0.7 316 6.3 0 316 6.3 17 2 301 172 FY04 6026 21.1 5633 93.5 5336 94.7 88.5 45 0.7 56 0.9 40 0.7 93 1.5 22 0.4 41 0.7 394 6.5 0 394 6.5 21 2 375 144 231 231 73 158 2.6 FY05 8387 39.2 7577 90.3 6211 82.0 74.1 855 10.2 68 0.8 49 0.6 265 3.2 41 0.5 88 1.1 810 9.7 63 873 10.4 40 0 833 291 541 541 163 379 4.5 FY06 9440 12.6 8100 85.8 6205 76.6 65.7 1280 13.6 78 0.8 57 0.6 280 3.0 39 0.4 161 1.7 1340 14.2 147 1487 15.8 93 2 1397 373 1023 1023 363 660 7.0 FY07E 9315 (1.3) 7887 84.7 7235 91.7 77.7 0 0.0 94 1.0 61 0.7 290 3.1 36 0.4 172 1.9 1428 15.3 365 1793 19.2 151 2 1644 562 1082 1082 388 694 7.4 FY08E 10713 15.0 9041 84.4 8296 91.8 77.4 0 0.0 112 1.0 75 0.70 318 3.0 45 0.4 194 1.8 1671 15.6 443 2114 19.7 186 2 1930 667 1263 1263 455 809 7.5 FY09E 12476 16.5 10504 84.2 9619 91.6 77.1 0 0.0 129 1.0 100 0.8 376 3.0 53 0.4 227 1.8 1971 15.8 612 2584 20.7 246 2 2340 781 1558 1558 561 997 8.0
Finished Goods purchased 129
Pre-tax profit 128 (before non-recurring items) Pre-tax profit 128 (after non-recurring items) Tax (current + deferred) Net profit PAT Margin (%) 41 87 1.7
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Balance Sheet
(Rs. mn) Current assets Investments Net fixed assets Total assets Current liabilities Total Debt - Short term - Long term Other non-current liabilities Total liabilities Share capital(*) Reserves & surplus - Retained Earnings Less: Misc. expenditure Shareholders funds FY03 3,300 0 354 3,654 794 2,385 2,212 174 0 FY04 4,275 1 687 4,963 1,114 2,874 2,728 146 0 3,988 696 280 171 (1) 974 4,963 3,848 FY05 6,866 2 1,578 FY06 8,714 6 3,070 FY07E 10,249 12 4,044 14,304 437 8,283 6,783 1,500 795 9,514 848 3,942 1,598 0 4,790 14,304 13,868 FY08E 11,909 23 4,451 16,382 475 8,889 7,089 1,800 1,136 10,499 875 5,008 2,256 0 5,883 16,382 15,908 FY09E 13,945 30 5,243 19,217 514 10,417 7,917 2,500 1,556 12,487 875 5,855 3,104 0 6,730 19,217 18,704
8,446 11,790 1,424 5,123 4,546 577 230 6,777 734 936 474 (1) 1,670 495 7,533 6,615 918 503 8,530 788 2,471 1,033 0 3,259
3,179 233 245 188 (2) 475
Total equity & liabilities 3,654 Capital employed 2,861
8,446 11,790 7,023 11,294
*Includes Preference Share Capital of Rs. 97.8 mn (FY03) and Rs. 400 mn (FY04 onwards).
Cash Flow Statement

(Rs. mn) Pre-tax profit Depreciation Chg in working capital Total tax paid Cash flow from oper (a) . Capital expenditure Chg in investments Other investing activities Free cash flow (a+b) Equity raised/(repaid) Debt raised/(repaid) Dividend (incl. tax) Other financing activities FY03 128 17 (648) (43) (545) (66) 3 (0) (608) 99 519 (8) 15 FY04 231 21 (637) (80) (354) (1) (148) (503) 464 489 (9) 52 996 27 FY05 541 40 (2,304) 90 (932) (1) 0 FY06 1,023 92 (2,874) (46) (1,584) (4) (0) FY07E 1,082 151 (1,563) (89) (420) (1,124) (6) 0 (1,130) (1,551) 966 751 (18) 0 1,698 148 FY08E 1,263 186 (1,636) (104) (290) (593) (11) 0 FY09E 1,558 245 (1,980) (139) (316) (1,037) (8) (0)
(466) (1,633) (1,804)
Cash flow from inv. (b) (63)
(933) (1,588) 501 2,249 (27) (109) 2,614 47 1,031 2,410 (158) 0 3,282 (109)
(604) (1,044) (894) (1,360) 435 606 (129) 0 912 17 0 1,528 (150) 0 1,378 18
(968) (2,567) (3,391)
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REI Agro
Income Statement
Yr ended 31 Mar (Rs. mn) FY06 . . Net sales Growth (%) Operating expenses Operating profit Other operating income EBITDA Growth (%) Depreciation Other income EBIT Interest paid Pre-tax profit 9,440 12.6 (8,100) 1,340 147 1,487 70.4 (93) 2 1,397 (373) 1,023 FY07E 9,315 (1.3) (7,887) 1,428 365 1,793 20.6 (151) 2 1,644 (562) 1,082 FY08E 10,713 15.0 FY09E 12,476 16.5
Cash Flow Statement

Yr ended 31 Mar (Rs. mn) FY06 . . Pre-tax profit Depreciation Chg in working capital Total tax paid Capital expenditure Chg in investments 1,023 92 (2,874) (46) (1,584) (4) FY07E 1,082 151 (1,563) (89) (420) (1,124) (6) (1,130) (1,551) 966 751 (18) 1,698 148 FY08E 1,263 186 (1,636) (104) (290) (593) (11) (604) (894) 435 606 (129) 912 17 1,528 (150) 1,378 18 FY09E 1,558 245 (1,980) (139) (316) (1,037) (8) (1,044) (1,360)
(9,041) (10,504) 1,671 443 2,114 17.9 (186) 2 1,930 (667) 1,263 1,971 612 2,584 22.2 (246) 2 2,340 (781) 1,558
Cash flow from oper (a) (1,804) .
Cash flow from inv. (b) (1,588) Free cash flow (a+b) (3,391) Equity raised/(repaid) Debt raised/(repaid) Dividend (incl. tax) 1,031 2,410 (158)
Cash flow from fin. (c) 3,282 Net chg in cash (a+b+c) (109)
(before non-recurring items) Pre-tax profit (after non-recurring items) Tax (current + deferred) Net profit Adjusted net profit Growth (%) Net income (363) 660 660 74.4 660 (388) 694 694 5.1 694 (455) 809 809 16.5 809 (561) 997 997 23.4 997 1,023 1,082 1,263 1,558
Key Ratios
Yr. ended 31 Mar. (%) FY06 EPS (Rs.) EPS growth EBITDA margin EBIT margin ROCE Net debt/Equity 17.0 50.3 15.5 14.6 15.3 229.8 FY07E 15.5 (9.0) 18.5 17.0 13.1 168.9 FY08E 17.0 9.9 19.0 17.3 13.0 147.5 FY09E 21.0 23.4 19.7 17.9 13.5 151.4
Balance Sheet
Yr ended 31 Mar (Rs. mn) FY06 . . Current assets Investments Net fixed assets Total assets Current liabilities Total Debt Total liabilities Share capital Reserves & surplus Shareholders funds Capital employed 8,714 6 3,070 11,790 495 7,533 8,530 788 2,471 3,259 11,294 FY07E 10,249 12 4,044 14,304 437 8,283 795 9,514 848 3,942 4,790 14,304 13,868 FY08E 11,909 23 4,451 16,382 475 8,889 1,136 10,499 875 5,008 5,883 16,382 15,908 FY09E 13,945 30 5,243 19,217 514 10,417 1,556 12,487 875 5,855 6,730 19,217 18,704
Valuations

Yr. ended 31 Mar (x) Net margin (%) Asset turnover Leverage factor Return on equity (%) FY06 7.0 0.9 4.1 26.8 FY07E 7.4 0.7 3.2 17.2 FY08E 7.5 0.7 2.9 15.2 FY09E 8.0 0.7 2.8 15.8
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Share Data
Mkt. Cap. Price BSE Sensex Reuters Bloomberg 52-week High/Low Issued Shares Rs. 0.97 bn (US$ 22 mn) Rs. 44 12886 LTOL.BO LTO IN Rs. 63/35 22.3 mn
LT Overseas
Aiming to enter Big league
Not Rated
Incorporated in 1990 as LT Overseas Private Limited (LT), the company became public limited company in 1994. It is primarily in the business of milling, processing and marketing of branded and non-branded basmati rice as well as manufacturing of food products. It has recently raised fund from the public through an initial public offer of 7 mn shares (inclusive 390,000 shares reserved for employees) of Rs. 10 each at a premium of Rs. 46.
Year to March P&L Data (Rs. mn) Net Sales Operating Profit Net Profit Margins (%) EBITDA Net Profit Balance Sheet (Rs. mn) Total Assets Shareholders Funds Per Share Data (Rs.) EPS CEPS Dividend Return (%) RoE RoCE 13.1 11.3 12.9 10.0 11.2 8.8 20.1 9.9 7.0 14.0 0 7.6 16.1 0 6.9 15.8 0 6.7 10.4 18.1 (1.6) (9.4) 2,388 389 2,624 427 2,901 463 3,145 549 9.6 12.2 6.4 1.7 4.9 1.5 6.0 1.4 7.0 2.5 2,826 181 48 3,615 176 54 3,609 216 50 4,008 281 111 FY03 FY04 FY05 FY06 CAGR (%) FY03-06 12.3 15.9 32.0

Promoters Public & Others 64 36
Brands like Daawat and Heritage have a strong recognition in Indian and international markets. LT recently raised capital through an IPO for expanding its capacity by 6 TPH for parboiling rice makes the total capacity by 36.5 TPH (inclusive of leased capacity of 3.5 TPH). AC Nielson ORG-MARG survey assessed a 22% volume share for LT and a 17.5% market share for their Daawat brand for CY05. At the current market price of Rs. 44, the stock trades at 6.5x FY06 EPS of Rs. 6.7.
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Global rice food company The company through its continuous efforts is trying to emerge as a global rice food company on the back of its strengths and a diversified business mix, suitable for achieving such goal. The company has strong raw material sourcing ability through relationship and rapport developed with farmers over the years, production of quality output at minimum cost through use of latest technology, presence in 35 countries through its products and a distribution network of 100 distributors in India. As the world is moving towards convenience foods, there is a growing acceptance of readyto-cook and ready-to-eat meals which will further the purpose of the company. Brand recognition The company has over the years established its brand in the rice industry and has 19 brands under its umbrella with the major being Daawat and Heritage. The company is also in the process of registering another 30 brands, the applications of which are pending at various levels. The brands of the company are registered in almost 40 countries. As per AC Nielsen ORG MARG survey 2005, Daawat has been among the top three basmati rice brands in India. Scale of operation The size of the company helps it in procuring raw materials at economical prices which is fed to its vast distribution network. The scale of operation also helps the company to cater to customers with large requirements. The size of operation has provided the company to achieve economies of scale which in turn has helped in pricing its product at competitive rates. The company has been ranked as one of the top three players in the domestic basmati rice market with a market share of around 22% as per AC Nielsen ORG MARG survey for 2005. Product portfolio The companys product portfolio consists of almost all types of rice such as brown rice, white rice, steamed rice, parboiled rice, organic rice, quick cooking rice, valueadded rice and flavoured rice in ready-to-cook segment. Daawat is the largest selling brand of the company and has sub-brands to cater various classes of customers. Strategic alliance The company has strategic alliance with Tata Chemicals for contract farming of basmati paddy to have access to better quality of rice and optimise the procurement process. It also has entered into strategic alliance with Phoenix Agri Silica Corporation to provide it the raw material in the form of by-product husk ash which is obtained while processing of rice. This plant would be producing silica for the cement industry. Group companies/firms The company by merging its group companies and firms under single entity can have more economies of scale. This would lead to tough competition to its competitors. The company might achieve higher growth rate both in topline as well as bottomline as compared to others by adopting such activity. INDIAN RICE INDUSTRY THEME REPORT 74
Targeting the potential in international market
Daawat largest selling brand of the company
Comprehensive product porfolio
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MARCH 2007
Investment concerns
Possibility of conflict of interest
Non-completion of the expansion programme may have a negative impact on the bottomline as the capacities will not be utilised to the maximum level. Subsidiaries/group companies/firms in similar business may be treated as a concern, as they may create conflict of interests. The details of such group companies/firms are:
Associate enterprises (Rs. mn)

Name of the concern Business activity Location Share capital Nature Bio Foods Limited LT International Limited Sona Global Limited Nice International FZE(~) Raghunath Agro Industries(*) Daawat Foods Private Limited(#) R S Rice & General Mills(*) Note: (~) (*) (#) Organic Agro Products Merchant Exporters & Traders General Trading General Trading Rice milling & processing (@) Food Products processing & Trading Rice milling & processing (@) New Delhi New Delhi Dubai Dubai Amritsar New Delhi Amritsar 0.5 20.0 12.2 12.2 38.5 10.0 1.1 LT Overseas Turnover holding (%) 99.9 90.0 100.0 100.0 0.0 96.9 0.0 0.0 496.0 0.0 0.7 (0.0) 0.0 (0.2) (0.7) 1.3 (0.0) 0.1 PAT
Wholly owned subsidiary of Sona Global Limited. Firm (1st column is partners capital). Group company.
(@) Capacity of 24,000 tonnes each.
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Business overview
Key milestones
Year 1990-91 1993-94 1994-95 1995-96 1998-99 Events Incorporation of company as private limited. Conversion of private limited company into public limited. Setting up of 1st own milling capacity of 4 TPH. Registration of Daawat brand in USA. Business of LCTRRM taken over with capacity of 6TPH. Star trading house recognition granted by GOI.Registration as well as launch of Daawat brand in Mauritius, Saudi Arabia and New Zealand. 2000-01 2001-02 2002-03 2004-05 2006-07 Processing facility with a capacity of TPH at Bahalgarh made operational. Registration as well as launch of Daawat brand in Australia. Registration as well as launch of Daawat brand in Canada. Capacity expansion at Bahalgarh by 6 TPH making the total capacity of the company 16 TPH. Further capacity expansion at Bahalgarh by 2 TPH making the total capacity of the company 18 TPH. Silos complex made operational. Further capacity expansion at Bahalgarh by 9 TPH making the total capacity of the company 27 TPH.
Company history
1999-00
Management
Vijay Kumar Arora, the Promoter Director of the company holds the position of Chairman-cum-Managing Director. His key areas of responsibility are international marketing, strategic planning, finance and business development. He is presently the Vice President of All India Rice Exporters Associations. Ashwani Arora, the Promoter Director holds the position of whole-time Director with key areas of responsibility such as marketing and brand promotion in the domestic market. Surinder Arora, the Promoter of the company has been serving as Director since 2000. Since he has a vast experience in procurement, production and plant operations his key areas of responsibility are the same.
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Duration Issued capital 1990-92 (Nos.) 1992-93 (Nos.) 1993-94 1994-98 1999-05 2006-07 20.0 45,781 1.1 2.3 7.2 22.3 45,761 0.6 2.2 4.9 15.0 Increase Face value (Rs.) 100.0 100.0 10.0 10.0 10.0 10.0 Subscriber to MOA Further allotment FV reduced to Rs. 10/share, Bonus in the ratio of 9:10, further allotment Bonus in the ratio of 2:3, Right issue Shares issued under ESOP Bonus issue in the ratio of 1:1, Pre-IPO placements, IPO issue Particulars
Processing facilities
Rice: The company has a combined capacity of 30.5 TPH processing of paddy at three processing facilities located one each in Bahalgarh and Sonepat in Haryana and one in Amritsar, Punjab. The 1st facility has a capacity of 27 TPH whereas the latter two have a combined capacity of 3.5 TPH on lease from group companies. Processed food: The company has taken on lease a food processing plant.
Capacity utilisation (Actual and proposed)

Capacity (MT) Installed Actual Expected Utilisation (%) FY04 157,680 114,606 72.7 FY05 175,200 143,523 81.9 FY06 158,712 127,327 80.2 FY07E 230,940 202,400 87.0 FY08E 293,670 232,760 79.0 FY09E 319,714 267,674 84.0
Source: Company prospectus
Products portfolio
LTs product portfolio consists of almost all types of rice such as brown rice, white rice, steamed rice, parboiled rice, organic rice, quick cooking rice, value-added rice and flavoured rice in ready-to-cook segment. The sub-brands of Daawat are classified into three classes i.e. for retail customers, for institutional segment, for economy segment.
Revenue mix
LT deals in two types of products i.e. own manufactured and traded products. These generated 93% and 7% to the total revenues of the company in FY06. The company has decreased its revenues from traded goods by 65% form Rs. 730 mn in FY05 to Rs. 263 mn in FY06. Export contributes 45% of the total revenue which is decreased by 26% as compared to FY05, due to the concentrating on the domestic market.
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Geographical break-up
80 60 40 % 20 0 -20 FY02 FY03 Domes tic (% of s ales ) Domes tic (Growth)
Source: Company
80 67.1 57.3 43.1 34.2 16.2 FY04 22.1 60 40 20 0 FY05 -10.5 FY06 -18.5 -20 % Exports (% of s ales ) Exports (Growth)
Distribution network
Global distribution network
The company has its presence in almost all major basmati consuming regions with strong distribution network of more than 100 distributors. The distributors provide the company with valuable feedback obtained by interacting with the customers, to increase the quality and quantity of its output. There are exclusive arrangements with most of the distributors in the domestic market. The companys products are presently available in 35 countries including USA, Canada, UK and the European Union with the help of its distribution network including both exclusive and non-exclusive arrangements. Some of the countries where the company has exclusive arrangements with its distributors are North America, South America and European region. It has plans to increase its presence in the overseas market by entering in Far East, Africa and Middle East.
Capex
Sourcing and deployment of funds
The company has planned to incur a capex of Rs. 317.2 mn. The company has during the year raised fund for capex requirement, through pre-IPO placements and an IPO, amounting to Rs. 53.5 mn and Rs. 394 mn, respectively. The capacity expansion at this facility will be of 6 TPH making the total capacity to be 36.5 TPH. (Inclusive of leased capacity of 3.5 TPH.)
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Details of cost of expansion programme (Rs. mn)

Project Civil ands other work Expansion, automation and modernisation at Sonepat (Haryana) New parboiled rice (sella) processing and milling capacity New milling line for producing value-added products Balancing equipments and automation of existing facility Increasing storage capacity + Silo grain storage + New white rice storage + Open Bardana shed Generating power for captive consumption Total 22.5 5.8 4.7 50.5 294.7 98.4 15.3 98.4 21.1 4.7 50.5 317.2 Jun. 07 Jun. 07 Jul. 07 Jul. 07 12.0 58.2 41.0 31.3 70.2 41.0 31.3 Sep. 07 Jul. 06* Sep. 06* Plant and Machinery Total Expected completion
B&Ks view
The company is trying to develop its decling export market with parboiled rice. Now LT is focusing on its own manufactured products and reducing its focus on traded goods. But the company is facing the heat of this competition in basmati rice segment from its peer group. At the current market price of Rs. 44, the stock trades at 6.5x FY06 EPS of Rs. 6.7.
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LT Overseas
Income Statement
Yr ended 31 Mar (Rs. mn) FY03 . . Net sales Growth (%) Operating expenses Operating profit EBITDA Growth (%) EBITDA Margins(%) Depreciation Other income EBIT Interest paid Pre-tax profit (before non-recurring items) Non-recurring items Pre-tax profit (after non-recurring items) Tax (current + deferred) Net profit Adjusted net profit Growth (%) PAT Margins (%) Net income (11) 48 48 33.0 1.7 48 (9) 54 53 8.9 1.5 54 (15) 50 50 (5.7) 1.4 50 (16) 111 102 104.7 2.5 111 60 1 63 65 10 128 2,826 57.8 (2,646) 181 181 4.9 6.4 (48) 67 199 (140) 60 FY04 3,615 27.9 (3,439) 176 176 (2.8) 4.9 (58) 88 205 (143) 62 FY05 3,609 -0.2 (3,393) 216 216 23.0 6.0 (64) 52 204 (139) 65 FY06 4,008 11.0 (3,727) 281 281 30.1 7.0 (57) 38 262 (144) 118
Cash Flow Statement

Yr ended 31 Mar. (Rs. mn) FY03 . Pre-tax profit Depreciation Chg in working capital Total tax paid Capital expenditure Chg in investments Other investing activities Free cash flow (a+b) Equity raised/(repaid) Debt raised/(repaid) Dividend (incl. tax) Cash flow from fin. (c) Net chg in cash (a+b+c) 392 21 144 41 362 (26) 60 44 (307) 9 (130) 2 (48) (371) 42 350 FY04 63 57 (119) (4.0) (2) (45) (3) (54) (101) (103) 37 107 FY05 65 57 (386) (13) (277) (58) (4) (50) (111) (388) 37 325 FY06 128 0 (89) (12) 26 (140) (63) (91) (294) (268) 86 238 (21) 303 35
Cash flow from oper. (a) (194)
Cash flow from inv. (b) (176)
Key Ratios
Yr. ended 31 Mar. (%) FY03 EPS (Rs.) EPS growth EBITDA margin EBIT margin ROCE Net debt/Equity 7.0 33.0 6.4 7.1 11.3 391.7 FY04 7.6 8.9 4.9 5.7 10.0 372.9 FY05 6.9 (10.1) 6.0 5.6 8.8 419.1 FY06 6.7 (2.8) 7.0 6.5 9.9 390.5
Balance Sheet
Yr ended 31 Mar (Rs. mn) FY03 . . Current assets Investments Net fixed assets Total assets Current liabilities Total Debt Total liabilities Share capital Reserves & surplus Less: Misc. expenditure Shareholders funds 1,990 6 392 2,388 413 1,566 1,998 69 332 (11) 389 FY04 2,236 9 379 2,624 499 1,673 25 2,198 69 386 (28) 427 2,624 FY05 2,508 12 380 2,901 412 1,998 28 2,437 69 436 (41) 463 2,901 FY06 2,549 76 520 3,145 328 2,236 32 2,596 72 532 (55) 549 3,145
Valuations
Yr. ended 31 Mar. (x) PER PCE Price/Book Yield (%) EV/Net sales EV/EBITDA 0.7 10.2 0.5 10.9 0.6 10.5 FY03 6.2 3.1 0.8 FY04 5.7 2.7 0.7 FY05 6.4 2.8 0.7 FY06 6.6 4.2 1.2 2.7 0.6 8.8

Yr. ended 31 Mar. (x) Net margin (%) Asset turnover Leverage factor Return on equity (%) FY03 1.7 1.3 5.8 13.1 FY04 1.5 1.4 6.1 12.9 FY05 1.4 1.3 6.2 11.2 FY06 2.5 1.3 6.0 20.1
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Share Data
Mkt. Cap. Price BSE Sensex Reuters Bloomberg Daily Volume 52-week High/Low Issued Shares Rs. 9.2 bn (US$ 209 mn) Rs. 161 12886 LAKO.BO LKEF IN US$ 0.1 mn (Rs. 4.4 mn) Rs. 232/131 57.1 mn
Lakshmi Energy and Foods

Capitalising through by-products
Not Rated
Incorporated in July1990, Lakshmi Energy and Foods Limited (LEAF), formerly known as Lakshmi Overseas Industries, is a leading processor of non-basmati rice. LEAF is slated to have an integrated processing plant for paddy along with the value-added products such as rice bran oil, cattle feed and a power plant; generating electricity up to 30 MW. To diversify its business mix, the company is also planning to set up a 300 TPD wheat flour mill at its existing plant location.
Year to March P&L Data (Rs. mn) FY03 FY04 FY05 FY06 CAGR (%) FY03-06 1,251 49 1 2,251 62 89 4,077 325 180 5,584 738 420 64.7 147.1 715.2
Performance (%) 1m Absolute Relative (22) (13) 3m (11) (5) 12m (18) (32)
Net Sales Operating Profit Net Profit Margins (%) EBITDA Net Profit Balance Sheet (Rs. mn) Total Assets Shareholders Funds Per Share Data (Rs.) EPS CEPS Dividend

Promoters FIIs Public & Others 39 40 21
3.9 0.1
2.7 4.1
8.0 4.4
13.2 7.5
1,477 792
1,397 822
2,050 999
3,360 1,632
31.5 27.2
250 200 150 100 50 0 Sep-05 Oct-06 May-05 Mar-07 Dec-04 Jan-06 Jun-06
0.0 0.4 0
1.9 2.3 0
3.4 4.0 3
7.7 8.6 4
688.8 167.3
Return (%) RoE RoCE 0.1 4.2 11.3 9.8 19.8 22.8 32.0 31.5
Laks hmi Energy & Foods Ltd (Actual) Sens ex
(*The EPS is calculated on the post- split equity base of 57.2 mn shares).
LEAF has first mover advantage since it had entered into non-basmati rice segment as an organised player, which was dominated mainly by unorganised players. The non-basmati rice market is largely a fragmented market even today. The company is also concentrating on processing of the by-products obtained from non-basmati rice processing, to improve its margins. LEAF is steadily increasing the capacity of power to 105 MW within next two-three years. Realisation from non-basmati rice processing is low, as it depends upon government policies in regards to minimum support price and levy rates to procure paddy and to sell it to Food Corporation of India. At the current market price of Rs. 161, the stock trades at 21.7x FY06 diluted EPS of Rs. 7.4 (post-stock split in the ratio of 5:1 in December 2006). INDIAN RICE INDUSTRY THEME REPORT 81
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MARCH 2007
Largest processor of non-basmati rise Among the major organised players in the industry, LEAF is the leader in non-basmati rice processing. The company is scaling its capacity from 2,100 TPD (87.5 TPH) to 3,300 TPD (137.5 TPH) by December 2006 and also ramping up additional 800 TPD, to scrap and replace the old plant gradually. The imported machines from Japan, Germany, Denmark and USA for its expanded capacities will definitely improve the head rice recovery rate going forward. The company is also planning to have a greenfield project for rice processing having a capacity of 1 mn tonnes (expected to be completed by FY09 at Moga in Punjab). Adding value to by-products LEAF has the advantage of further processing by-products i.e. husk, bran and nakku obtained from rice processing. These are processed for the following purposes: Biomass power plant: Husk is a major byproduct in processing of paddy with an output of around 20%. LEAF will use the same to generate power, which in return will contribute to the company margin. The first phase of power generation will start with a capacity of 30 MW at Khamanon. Out of the 30 MW, 15 MW will be operational in the 4th quarter of FY07 and the remaining 15 MW will be operational in the 2nd quarter FY08. The company would further install two more power plants of 30 MW each in next two years and will be followed by one in the 3rd year with a capacity of 15 MW. In total the power plant will generate 105 MW of electricity within the next three-four years. The company has signed the agreement with Punjab State Electricity Board (PSEB) to sell power from cogeneration units at Rs. 3.48/unit as per the promotion policy of the Ministry of Non-conventional Energy Sources (MNES). Oil: Rice bran oil can be produced from bran, whose demand is increasing by 5 lacs tonnes per annum due to increase in population and rise in the disposable incomes. Presently, there is a demand-supply mismatch of round 50 lacs tonnes in the domestic market, the demand and supply are 115 lac and 65 lac tonnes, respectively. The company has a capacity of 200 TPD (2,500 TPH) which is expected to increase to 400 TPD by January 2007. The refinery capacity is also expected to increase from 30 tonnes (375 TPH) to 60 tonnes. The company is using de-oiled cakes to produce cattle feed. It currently has a production capacity of 130 TPD which is expected to increase to 300 TPD by May 2007. These value-added products will definitely help in realising better margins for the company in years to come. Wheat flour mill LEAF is expanding its portfolio from just a non-basmati rice processor by adding wheat flour mill to its product profile, in Khamano plant. The facility is having a capacity of 300 TPD is expected to contribute Rs. 500 mn in the topline for FY08.
Leader in non-basmati rice
Power from husk
Oil from bran
82
B&K RESEARCH Well-defined margins
MARCH 2007
Buying and selling to FCI
LEAF procures its raw material i.e. paddy from FCI at minimum support price (MSP) fixed by the government. The average procurement cost (inclusive of 4% market fees, 4% VAT, 2.5% commission paid to agents, 1% brokerage, 1% labour charges, 4% freight cost ant cost of gunny bag), is higher than MSP. And in turn sells its production to FCI at levy rate. LEAF sells 75% of its products to FCI, which is located at a distance of 1 km from the companys plant and balance 25% is sold in the open market through the traders. Location advantage LEAF processing facility is located in Punjab, which is said to be the largest surplus producer of rice in India. The government procures over 95% of rice produced in the state at the pre fixed prices both for the paddy as well as rice ,thus, removing any price risk for the processors. For FY07, LEAF is procuring paddy and selling the final output at around Rs. 6, 500/MT and Rs. 11, 840/MT, respectively. Expansion benefits o Incentives from government for Biomass Power Plant: LEAF is implementing all its expansion projects in the state of Punjab. State government and Central government have granted the company various incentives for all its power expansion programmes. It has been granted single window clearance by empowered government committee due to the companys entry into non-conventional power. The company would also be granted 100% tax exemption and depreciation benefits for its Biomass power plant and will get the waiver of 4% market fee once the plant becomes operational. o Power to earn carbon credits: Its power plant will be eligible for carbon credits under the Kyoto Protocol and is eligible to en-cash these within a period of 10 years. There is a huge demand for credits from the European market. LEAF power plant with a capacity of 30 MW is expected to fetch CERs of around 140,000 units/annum. Currently, the price floating in the market for these credits is 10 Euro per credit. The company has appointed Ernst & Young (E&Y) as the advisors for credits earnings. Companies under promoter control Ganeshay Overseas Industries Limited (Ganeshay) is an associate company, with a capacity of 25 TPH for paddy processing which is expected to increase to 50 TPH. It has a turnover of Rs. 371 mn and has reported a PAT of Rs. 21 mn in FY06. LEAF is planning to merge Ganeshay to achieve economies of scale and consolidation of similar businesses under single company. LEAF is also planning to incorporate a wholly owned subsidiary with the object of conducting other related business activities.
Pre-fixed prices reduces the risk
Single window clearence from State and Central Goverments
Potential source for cash flows
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B&K RESEARCH
MARCH 2007
Investment concerns
Support price
LEAF margin is mainly dependent upon the MSP for procurement of paddy and levy prices for rice, fixed by the government. It sells almost 75% of its processed rice to the FCI which in turn sells it to common public at large.
Competition
As the non-basmati market is mainly unorganised, many large players are looking towards it as an opportunity to enter. This could be a threat for LEAF resulting in reduction in its margins as well as its market share in this segment.
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MARCH 2007
Business overview
Management
Mr. Balbir Singh Uppal, Chairman is a Promoter Director of the company. He holds the position of MD of the company since inception. His experience in the food grain processing industry is almost more than 20 years. Mr. Janak Raj Singh Uppal is the Executive Director of the company and has extensive experience in the grain processing industry.

Duration Issued capital 1993-94 94-00 2.0 4.4 8.6 9.9 10.4 10.9 11.4 57.1 2.3 4.2 1.3 0.5 0.5 0.5 Increase Face value (Rs.) 10.0 10.0 10.0 10.0 10.0 10.0 10.0 2.0 Public Issue in 1995 Bonus Issue in 2000 in the ratio of 1:1 Reduction of 0.2 mn shares 03-04 04-05 05-06 06-07 Preferential Issue Preferential Issue Preferential Issue Conversion of warrants Stock-split in the ratio of 1:5 Particulars
Stock-split in the ratio of 1:5
00-03
Product portfolio
Rice Paddy Rice Oils Rice Bran Oil Cotton Seed Oil Mustard Oil Sunflower Oil De-oiled cakes Rice Bran DOC Others Cattle Feed Damaged Wheat Paddy Husk Bardana Gold Rice Bran Khudi Phak
Value-added products complementing the product portfolio
Nakku
Different classes under its products

Category Rice Refined Oils Cattle Feed Brand Lakshmi Foods Gold Crown Hira Moti Products Non-basmati Rice Rice Bran, Sunflower, Mustard, Cottonseed and Soya Oil Punjab, Delhi
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MARCH 2007
Revenue break-up
LEAF revenue contribution is mainly from non-basmati rice (including parboiled rice) sales in the domestic market. The proportion of revenues from raw non-basmati rice and parboiled non-basmati rice is in the ratio of 90:10, respectively. The net sales have increased by 37% to Rs. 5.6 bn (FY06) from Rs. 4.1 bn (FY05). Rice: Contribution of rice in total revenue has increased to 86% (Rs. 4.9 bn in FY06) from 63% (Rs. 2.6 bn in FY05) mainly due to increase in capacity utilisation from 65 TPH to 105 TPH. Value-added products: De-oiled cakes (DOC) and oils sales are the value-added products contributing around 8% in the total revenue, the revenues from such products has increased by 236% to Rs. 458.4 mn (FY06) from Rs. 136 mn (FY05). Others: Revenue contribution from others in FY06 was around 6% amounting to Rs. 250 mn a decline of 82% from previous year which was around Rs. 1,369 mn. The main reason for such decline was on account of sales of damaged wheat which was Rs. 203 mn in FY06 comparatively lower by Rs. 1,058 mn in FY05.
Revenue mix
FY06
8% 6%
FY05
34% 3%
Rice Oil & De-oiled cakes

86%
Source: Company
Others
63%
Capex and its funding

Particulars Capex (Rs. mn) Biomass power plant Rice Wheat Bran oil Cattle feed 1, 100 1, 000 220 100 50 Mar. 07 Dec. 06 Jul. 07 Jan. 07 May 07 Nil 2,100 TPD Nil 200 TPD 130 TPD 105 MW 3, 300 TPD 300 MT 400 TPD 300 TPD Power Finance Corporation Punjab National Bank and Syndicate Bank Completion Old capacity New capacity Source of funding
86
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MARCH 2007

(Rs. mn) Net Sales EBITDA EBITDA Margins (%) Other Income Interest Depreciation PBT Tax Adjusted PAT PAT Margins (%) EPS (Rs.) 3QFY06 1565 213 13.6 2 (18) (8) 189 (38) 151 9.7 3 3QFY07 1820 335 17.5 3 (12) (12) 314 (31) 282 14.8 5 YoY (%) 16.3 57.2 22.4 (36.3) 63.2 65.7 (17.1) 86.4 9MFY06 4124 486 11.8 8 (36) (22) 435 (89) 347 8.4 6 9MFY07 4913 837 16.2 5 (30) (34) 778 (78) 700 13.5 12 YoY (%) 19.1 72.1 (27.2) (17.9) 54.8 78.8 (12.2) 102.1
B&Ks view
LEAF has achieved significant presence in non-basmati rice which is largely an unorganised segment (95%) in rice industry. With its further impetus on using its residual products (like Husk and Bran) for power generation and edible oil, the company expects to add revenue at an expected growth rate of 25% for the next two years. The company also foresees improvement in margins, as a result of low operational cost on this portion of revenue. The company has split its share of face value Rs. 10 each into 5 equity shares with a face value of Rs. 2 each with effect from 18th December 2006. The number of outstanding shares as on date is 57.2 mn shares. At the current market price of Rs. 161, the stock trades at 21.7x FY06 diluted EPS of Rs. 7.4 (on account of stock split).
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MARCH 2007
Lakshmi Energy and Foods
Income Statement
Yr ended 31 Mar (Rs. mn) FY03 . . Net sales Growth (%) Operating expenses Operating profit EBITDA Growth (%) Depreciation Other income EBIT Interest paid Pre-tax profit (before non-recurring items) Non-recurring items Pre-tax profit (after non-recurring items) Tax (current + deferred) Net profit Adjusted net profit Growth (%) Net income 0 1 1 (9) 89 92 (110) 180 180 97.2 180 (216) 420 420 133.0 420 0 1 (2) 98 290 637 1,251 2.0 (1,202) 49 49 (21.8) (19) 30 60 (59) 1 FY04 2,251 80.0 (2,189) 62 62 25.9 (20) 87 128 (28) 100 FY05 4,077 81.1 (3,753) 325 325 427.2 (27) 42 340 (50) 290 FY06 5,584 37.0 (4,846) 738 738 127.3 (49) 8 696 (59) 637
Cash Flow Statement

Yr ended 31 Mar (Rs. mn) FY03 . . Pre-tax profit 1 Depreciation 54 Chg in working capital 121 Total tax paid 0 Cash flow from oper. (a) 177 Capital expenditure (17) Chg in investments 1 Other investing activities 6 Cash flow from inv. (b) (10) Free cash flow (a+b) 167 Equity raised/(repaid) 1 Debt raised/(repaid) (125) Dividend (incl. tax) (6) Other financing activities (36) Cash flow from fina. (c) (167) Net chg in cash (a+b+c) 0 FY04 98 56 49 2 205 (38) 0 (28) (66) 139 16 (106) (12) (36) (138) 1 FY05 290 63 (400) (30) (77) (95) (1) 0 (96) (173) 67 236 (30) (36) 236 63 FY06 637 85 (746) (78) (103) (401) (3) (1) (405) (507) 273 315 (28) (36) 524 17
Key Ratios
Yr. ended 31 Mar (%) EPS (Rs.) EPS growth EBITDA margin EBIT margin ROCE Net debt/Equity FY03 0.0 3.9 4.8 4.2 68.9 FY04 1.9 2.7 5.7 9.8 53.4 FY05 3.4 86.3 8.0 8.3 22.8 61.1 FY06 7.7 122.4 13.2 12.5 31.5 55.7
3,205.8 11,748.9
3,205.8 13,463.1 1 89
Balance Sheet
Yr ended 31 Mar (Rs. mn) FY03 . . Current assets Investments Net fixed assets Total assets Current liabilities Total Debt Other non-current liabilities Total liabilities Share capital Reserves & surplus Less: Misc. expenditure Shareholders funds 685 86 707 (1) 792 822 1,397 999 2,050 1,632 3,360 974 1 502 1,477 132 552 FY04 913 1 484 1,397 127 446 2 576 99 723 FY05 1,532 2 516 2,050 345 682 24 1,051 104 895 FY06 2,523 5 832 3,360 637 997 94 1,728 179 1,453
Valuations
Yr. ended 31 Mar. (x) PER PCE Price/Book Yield (%) EV/Net sales EV/EBITDA FY03 9,091.3 316.9 7.7 0.1 6.9 177.1 FY04 76.7 62.8 8.5 0.2 3.8 138.9 FY05 41.2 35.8 7.4 0.4 2.1 26.9 FY06 18.5 16.6 4.8 0.3 1.6 12.2

Yr. ended 31 Mar. (x) Net margin (%) Asset turnover Leverage factor Return on equity (%) FY03 0.1 0.8 1.9 0.1 FY04 4.1 1.6 1.8 11.3 FY05 4.4 2.4 1.9 19.8 FY06 7.5 2.1 2.1 32.0
88
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MARCH 2007
B&K Securities is the trading name of Batlivala & Karani Securities India Pvt. Ltd. Analyst Certification We, Rohit Anand & Rishab Bothra, hereby certify that the views expressed in this report accurately reflect our personal views about the subject securities and issuers. We also certify that no part of our compensation was, is, or will be, directly or indirectly, related to the specific recommendation or view expressed in this report. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, print, publishing, photocopying, recording or otherwise without the permission of Batlivala & Karani Securities India Pvt. Ltd. Any unauthorized act in relation to all or any part of the material in this publication may call for appropriate statutory proceedings. The information contained herein is confidential and is intended solely for the addressee(s). Any unauthorized access, use, reproduction, disclosure or dissemination is prohibited. This information does not constitute or form part of and should not be construed as, any offer for sale or subscription of or any invitation to offer to buy or subscribe for any securities. The information and opinions on which this communication is based have been complied or arrived at from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to their accuracy, correctness and are subject to change without notice. Batlivala & Karani Securities India P Ltd and/ or its clients may have positions in or options on the securities mentioned in this report or any related investments, may effect transactions or may buy, sell or offer to buy or sell such securities or any related investments. Recipient/s should consider this report only for secondary market investments and as only a single factor in making their investment decision. The information enclosed in the report has not been whetted by the compliance department due to the time sensitivity of the information/document. Some investments discussed in this report have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when the investment is realized. Those losses may equal your original investment. Some investments may not be readily realizable and it may be difficult to sell or realize those investments, similarly it may prove difficult for you to obtain reliable information about the value, risks to which such an investment is exposed. Neither B&K Securities nor any of its affiliates shall assume any legal liability or responsibility for any incorrect, misleading or altered information contained herein. B & K SECURITIES INDIA PRIVATE LTD.
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Batlivala & Karani

5th March 2007

Indian Rice Industry

EPS CAGR (%)

(Rs.) MP MP Sell 125 69 193

(Rs.) 154 66 145

FY06-09E 33.8 6.3 7.3 FY04-07* 38.7 103.4

FY08E FY09E 4.1 6.3 11.3 3.4 5.4 9.2

FY06 FY07* 6.6 18.5 2.2 10.1

Rohit Anand [email protected] Tel.: +91-120-4259823

Rishab Bothra [email protected] Tel.: +91-120-4259823

INDIAN RICE INDUSTRY THEME REPORT

Dominance of rice as staple food for 50% of worlds population

Global paddy production and area

India producing 22% of world total rice

INDIAN RICE INDUSTRY THEME REPORT

World rice production (Average 1994-2004)

0.4 EU (15 countries)

0.4 Iran Rest of the world

Opportunities for organised business to grow

Comparative advantage with organised players

INDIAN RICE INDUSTRY THEME REPORT

Break-up of rice industry

Organised retail to boost the trade further

Acceptance of Indian rice in the global markets

Exports and Exports as the % of production

Export as the percantage of total production

Source: All India Rice Exporters Association

INDIAN RICE INDUSTRY THEME REPORT

India Largest producer and exporter of basmati rice

Export (Basmati vs. Non-basmati)

Level of non-basmati exports depends on production depends on weather conditions

Improving disposable income to further the demand

INDIAN RICE INDUSTRY THEME REPORT

High working capital required

Turnover ratios (FY06)

Seasonal availability of paddy

Low entry barrier

Rice still traded as commodity

Margins dependent on level of value added

INDIAN RICE INDUSTRY THEME REPORT

Source: Company (REI)

Global market (US$ 120 bn i.e. Rs. 5.4 trillion)

Demand-supply gap in global market

INDIAN RICE INDUSTRY THEME REPORT

Indian market (US$ 23 bn i.e. Rs. 1 trillion)

Rice production India

Source: All India Rice Exporters Association

Rice consumption India

Cons umption of Rice

INDIAN RICE INDUSTRY THEME REPORT

Major paddy producing regions in India

INDIAN RICE INDUSTRY THEME REPORT

Basmati rice industry

India catering to 75% of global basmati demand

Basmati rice composition Domestic

INDIAN RICE INDUSTRY THEME REPORT

Basmati paddy traded through mandis

Growth expected at 6-8% p.a.

Total basmati and proportion of India and Pakistan