Rice to riches

PENNY WISE

Rice processor Lakshmi Overseas is hoping to make money out of its husk, literally.

Balbir Singh Uppal has discovered a way of having his cake and eating it, too. The chairman and managing director of Lakshmi Overseas, a firm which earns its revenues by processing the paddy to get rice, has spotted moolah in the mountains of husk that his company weeds out.

Uppal has firmed up plans to put up a 24 mw power plant which will use husk as feedstock. Over the next two years the company plans to spend Rs 150 crore on expansion, of which, about Rs 90 crore will go towards setting up the plant.

If all goes well, Uppal hopes to achieve sales of Rs 1,000 crore and a net profit of Rs 90-100 crore in FY06-07. A third of the net profit will accrue from the power business then.

Considering that the company has clocked sales of Rs 273 crore and net profit of Rs 14 crore in the first nine months of FY04-05, the projections look rather overambitious. Yet there could be enough room for growth.

As per Uppal's calculations, rice sales will bring in about Rs 450 crore revenues in FY05-06 and about Rs 700 crore in the year after. Other businesses, including power, will contribute Rs 300 crore, up from Rs 100 crore in FY05.

Lakshmi Overseas buys paddy, processes it and sells rice. Of every 100 kg of paddy, the company gets 78 kg of raw rice and 20 kg of husk, the rest being wastage. The raw rice is then processed to get 67 kg of rice, 2 kg of nakku and 9 kg of rice bran. Rice bran is used for producing edible oil and cattle feed. The husk can be used for producing power.

As the company gains in size, it plans to make use of all the by-products to the fullest. Actually, it is focussed on non-basmati rice, mainly because it can process "more rice for the same value", thereby, maximise revenues from by-products, explains Uppal.

Currently, the company has capacity to process 2100 tonnes per day (tpd) of rice. This is likely to be raised to 3100 tpd. In addition, it plans to double its capacity to extract solvents and refine edible oil to 400 tpd and start a 24 mw co-generation plant. It also intends to extract starch from nakku which it will sell to alcohol manufacturers.

Lakshmi Overseas sells its rice output to Food Corporation of India. In FY05, the price was Rs 10.8 per kg. It is confident of selling its increased output to FCI or the open market. Nakku is sold in the open market at Rs 2/kg Similarly, edible oil is sold to Marico and cattle feed is sold in the open market.

The company has signed a power purchase agreement (PPA) with the Punjab State Electricity Board (PSEB) for the power plant. PSEB will purchase power from the company at Rs 3 per unit. Of the 24 mw power to be produced, the company will use about 3 mw for captive consumption. By FY07, power will contribute Rs 80 crore to the turnover and a third to profits, boosting margins.

The company will spend around Rs 150 crore over the next two years. Of this, Rs 90 crore will go towards setting up the power plant, Rs 15 crore for paddy processing, Rs 15 crore for refinery and about Rs 2-3 crore for equipment.

"The expansion will be funded through internal accruals and debt," says Uppal. However, with a net of Rs 20 crore in FY05, the company has no option but to fund a bulk of its capex through borrowings. It has total debt of Rs 78 crore at present and its expansion would mean an additional borrowing of Rs 135 crore by FY07.

"If the company expands as per plan and sells its proceeds fully, it could end up with a net profit of Rs 33 crore in FY06 and Rs 67 crore in FY07," according to Sonal Shrivastava, analysts at Fortis Securities.

One major downside for the company may be its inability to procure enough paddy, just in case mother nature plays spoil-sport, to keep its mills running at full capacity. The rise in Lakshmi Overseas' share price over the past one year looks scary.

The stock has jumped 10 times from Rs 20 to Rs 235 now. Too good to expect any dramatic rise going forward. It's a good stock to keep a watch on. But right now, for investors, there is no such luck as having their cakes and eating them, too.

Patent blues

NEWS IMPACT

Pharma major Dr Reddy's Laboratories stock declined after losing a patent challenge case against Eli Lilly and Co. The scrip lost 4.44 per cent to close the week at Rs 711.80. It declined 3.41 per cent on Friday alone.

A US District Court upheld the validity of a patent on Lilly's blockbuster Schizophrenia drug 'Zyprexag,' which was challenged by a trio of generic makers - Dr Reddy's, Ivax Corp and Teva Pharmaceuticals. Zyprexa had global sales of $4.42 billion last year - nearly one third of Lilly's total revenue.

According to analysts, the ruling comes as a set back to Dr Reddy's Labs, which was bidding to make a copy of Zyprexag and was looking forward to give a boost to bottomline after the lacklustre performances in the past few quarters.

Dr Reddy's said it will appeal to the Federal Circuit against a US court's decision and will continue to build its generics business in the US. Indian drug companies like Dr Reddy's have been targeting the US market for generic products, which they can produce at a fraction of the cost for patented ones.

However, analysts say their view on the stock is unlikely to be changed following the verdict as the case was not factored into estimates.

Dr Reddy's decision to focus on patent challenge opportunities has backfired. The company had lost three key patent challenges, including the one against Pfizer's anti-hypertension drug, Norvasc, in the past couple of years.

As a result, it has not had a major generic launch since its exclusive marketing rights for a version of Eli Lilly & Co's anti-depressant Prozac ended in January 2002.

On consolidated US GAAP basis, Dr Reddy's reported a 93 per cent fall in net profit to Rs 4 crore in Q3 FY05 from Rs 59.20 crore in Q3 December 2003. Consolidated sales went down 8 per cent to Rs 471 crore.

Dr Reddy's R&D spend amounts to 15 per cent of its revenues, which is the highest among Indian pharma companies. The high R&D spend coupled with lower generic sales is expected to result in the company posting a 72 per cent drop in profits in FY05.