Grain gain

PENNY WISE

Basmati rice player KRBL is likely to do well given the domestic consumption story, its move into value-added products and exports.

Growing consumerism and the advent of modern retail packaged food increasingly gaining consumer attention, the strength of a brand will make a difference. KRBL, which has a bouquet of basmati rice brands, and has been a dominant export player, is also increasing its presence in supermarket shelves.

KRBL, the largest basmati rice exporter from India, accounts for 11 per cent of our total rice exports. It exports rice to all the basmati markets of the world like Saudi Arabia, Kuwait and UAE under the India Gate, Doon, Nur Jaha, Bemisal, Lotus and Aarti brand names.

In fact, as per a HDFC Securities report, KRBL commands a 51 per cent market share in US. "India and Pakistan are the only basmati rice producing countries and due to increased global population, the demand for basmati rice exports will also have an upward trend," says Anoop Gupta, joint managing director, KRBL.

Exports are expected to contribute around 45 per cent to the company's revenues from FY07-FY09.

More than rice
What has made this stock attractive, is its acquisition of a plant at Dhuri in Punjab. This plant has the world's largest capacity which has resulted into a total combined capacity of 195 tonne per hour for the company.

"We were able to commission the plant at a capex of Rs 100 crore whereas a similar facility would require more than Rs 250-300 crore to be installed," says Gupta.

The acquisition of this integrated entity has in turn made KRBL an integrated player. KRBL will be able to convert by-products produced during the milling process into value-added products like rice bran oil and furfural oil that ensure higher realisations along with better margins which in turn will boost profitability.

KRBL's net profit margin for rice processing is around 4-4.5 per cent at present, which will rise once its starts selling by-products generated through integration. "With the sale of by-products, the margin will improve by 200 basis points," says Gupta.

Both, the company and analysts are upbeat about KRBL's integration plans and feel that it is difficult for competition to beat KRBL due to this acquisition.

"The manufacturing of these products requires an uninterrupted supply of raw materials, which is only possible in case of integrated plants. This is what gives KRBL the edge over other players," says an analyst from retail research, HDFC Securities.

"There is huge potential and demand for our by-products and no one in India has the capacity that we have. There is no competition in this field for the quality which is being produced by KRBL," feels Gupta.

Rice bran oil, is a high quality vegetable oil that can be used for cooking. Besides extraction of oil from bran, de-oiled cakes can also be produced which are used as cattle feed.

According to the HDFC Securities analyst, the unrefined rice bran oil earns Rs 38-45 per kg while the refined bran oil earns Rs 90 per kg. Furfural is a utility chemical with diverse uses.

Furfural oil, produced from the husking process is a basic raw material in refining industry and is used as a cleansing agent in refineries. At present, it is an import substitute.

By FY08 and FY09, by-products are expected to chip in around 5.27 per cent and 5.55 per cent to revenues, respectively. Though the amount seems small, analysts are bullish on the margins KRBL will earn from these by-products. 
 

PEER COMPARISON
(Trailing 12 month P/E)
Kohinoor Foods	7.17
Lakshmi Energy	14.37
KRBL	8.18
Rei Agro	7.59

Core business
The Dhuri plant has a capacity of 150 tonne per hour of basmati rice and 50 tonne per day of rice bran oil. KRBL has basmati rice processing plant at Ghaziabad too which has a capacity of 45 tonne per hour.

Such a capacity enables the company to enjoy economies of scale and as a result, sell cheaper in the international markets.

The plant also has the capacity to generate 10.5 MW of power using husk as fuel at low cost for own consumption as well as outside sale thus providing an additional stream of revenue for KRBL.

The company is eligible for carbon credits for the same. KRBL has also put up wind power with an outlay of Rs 60 crore for a 12.5 MW capacity.

Besides, the company also receives various exemptions for this plant from the Punjab government. "These concessions and exemptions have resulted in lower raw material costs, and have strengthened the company's edge in a competitive market place," says Gupta.

KRBL's policy of contract farming assures supply of raw materials to the company. Around 40 per cent of the company's paddy requirements are being met through contract farming.

One of the main risks associated with rice companies is their dependence on nature. Also, the seasonality in rice calls for intense high quality warehousing. Since the harvest season is for a period of two-three months, the entire inventory has to be stored for the whole year.

Also aging is an important aspect of basmati processing, in which the grains need to be stored up to a year. So, a good storage system is vital to enhance the quality of the product. High inventory levels accompanied by high interests costs, is a matter of concern for rice companies.

KRBL also sees increasing competition from countries like Vietnam and Thailand that offer low-cost manufacturing bases as a threat in the non-basmati rice segment.

While, the domestic branded basmati rice market is growing at about 6 per cent annually, the overall branded basmati rice is growing at 15 per cent a year. The non-basmati rice segment is growing at just 3-4 per cent.

"Rice continues to be the staple food of about 65 per cent of India's increasing population. Also, the basmati rice segment continues to be highly organised, where we can capture an attractive market share," says Gupta.

In the June quarter, the company posted a y-o-y sales growth of 25.84 per cent to Rs 190.29 crore. While the operating profit improved by 70.76 per cent to Rs 30.48 crore, the net profit surged 81.29 per cent to Rs 14.05 crore. 
 

FINANCIALS
(Rs crore)	Q1FY07	Q4FY06	Q3FY06	Q2FY06
Net Sales	190.29	181.26	214.84	177.45
q-o-q growth (%)	4.98	-15.63	21.07	17.35
Operating Profit	30.48	23.53	27.69	21.45
q-o-q growth (%)	29.54	-15.02	29.09	20.17
OPM (%)	16.02	12.98	12.89	12.09
Net Profit	14.05	5.70	10.53	8.05
q-o-q growth(%)	146.49	-45.87	30.81	3.87
NPM (%)	7.38	3.14	4.90	4.54

Capacity expansion, forward integration of value added products including power would drive growth for the company.

Gupta expects KRBL's topline to grow 47 per cent to Rs 1066 crore in FY07 as the Dhuri plant will be fully operational by then. A 17 per cent growth to Rs 1,251 crore is projected for FY08 as more basmati will be processed at the new plant and an 8 per cent growth is expected in FY09 to Rs 1,351 crore. The company forecasts its net profit to be Rs 65 crore in FY07, Rs 75 crore in FY08 and Rs 95 crore in FY09.

At the current price of Rs 157.6, the stock is trading at 9.01 times its FY06 earnings. Based on company estimates, it is trading at 5.89 and 5.11 times its FY07 and FY08 earnings.

At present, the company's valuations are on par with its peers, barring Lakshmi Energy and Foods, which some analysts feel is expensive. But given its business model and the expected growth, analysts believe that it should fetch better valuations going forward.