Will this Lakshmi bring wealth?

PENNY WISE

Strong domestic demand for non-basmati and a foray into biomass-based power should boost the company's fortunes.

The domestic rice processing industry, today, is largely present in the unorganised sector.

However, there are a few players such as Satnam Overseas, REI Agro, KRBL and Lakshmi Energy & Foods (formerly Lakshmi Overseas) in the organised sector.

Lakshmi is the market leader in the non-basmati segment. The company already has cattle-feed and rice bran oil units.

In addition, it plans to utilise the waste "" rice husk "" to generate power. However, this is largely a family-managed company and with increasing competition, it would need to strengthen the management team and gear up to combat competition and price fluctuations, possibly through branding initiatives. Lakshmi does not plan to shift its focus to the export-oriented basmati segment.

A leader in the field
The company, a leading processor of rice, has a fully integrated processing plant, one of the largest in the country.

Balbir Singh Uppal, chairman and managing director, says the company currently procures almost 7 per cent of all the paddy grown in Punjab.

"Our rice mill capacity will increase from 105 tonne a hour at present to about 130 tonne in FY07, while solvent capacity will increase from 200 tonne a day to 400 tonne and cattle feed capacity will increase from 100 tonne to about 300 tonne." The cost of expansion and modernisation would be about Rs 90 crore.

The company finds its by-products becoming profitable. It processes its rice bran powder, to make edible oil and de-oiled cake. It then processes the edible oil to make refined oil, which it sells at a higher price. It also processes its other by-product "" broken rice "" to make starch, which is also sold at an incremental price by the company.

Onkar Baheti, president-commodities, Networth Stock Broking, says the company is losing out on the premium customers owing to lack of branding at present.

Its margins, he believes, will substantially improve if the company gets into branded products. Moreover, not having a presence in basmati rice deprives it of the high-end and export markets, Uppal adds.

Competition will also increase in the domestic market, as more players enter the field. That is when professional management will be a crucial issue.

While more crop is grown on lesser land with the use of chemical fertilisers, analysts feel the same could adversely impact the quality of soil in the long run.

Moreover, any change in the paddy prices, Food Corporation of India (FCI) norms and weather fluctuations directly affect the performance of the processing industry.

Uppal says the paddy output in Punjab increases about 10 per cent every year, and Lakshmi is planning to get into contract farming.

At present, the company sells in wholesale to the government, but it has plans to get into branded products. He does not see a major market for non-basmati rice abroad, even as the domestic market offers a huge opportunity. The company will also set up a wheat-processing plant of 300 tonne a day.

India's annual rice production is around 90-100 million tonne (MT) and consumption is around 80-85 MT. Rice is cultivated in both seasons "" Kharif (80-85 per cent) and Rabi.

There are more than 1,00,000 small and medium rice mills/ huller-cum-shellers in the unorganised sector. Only about 20 per cent of the rice processing capacity is in the organised sector, in which most units are into export of rice or are into selling branded rice.

Rice exports are valued at about $800 million a year, most of which fall under the basmati segment. Of the total basmati rice produced, about 70 per cent is exported.

While almost the entire basmati production is processed, of the non-basmati produced only about 35-45 per cent is processed.

According to Baheti, last year, the overall rice production was more than the previous year, and FCI made huge purchases during FY06. Uppal expects stable trends in rice price movements this year.

Power play
The upcoming energy business, with 30 MW capacity, will commence from January 2007 and is expected to contribute 40 per cent of the profits in FY08, which will be tax-free, Uppal says.

The power generation capacity is expected to touch 105 MW by FY10. Baheti observes that Lakshmi's foray into biomass-based power generation will reduce the overall cost of operations for the company and will generate additional revenue. The company will also be eligible for carbon credits.

Financials & Valuation
The company plans to utilise the proceeds of the recent preference share issue for the above expansions.

At present, it is a zero-debt company, even as it will approach Power Finance Corporation whenever required for the energy project, which is expected to cost about Rs 109 crore. Uppal denies any plans for raising more equity, even as market watchers feel that the company may look at fresh equity issue, going forward. 
 

FINANCIALS
Rs crore	FY06	FY05	Change (%)
Net sales	560.25	407.71	37.41
Operating profit	78.83	32.90	139.60
OPM %	14.07	8.07	-
Net profit	55.72	20.26	175.02
EPS (Rs)	51.18	19.51	-
P/E (trailing 12 months)	-	-	15.2x

In October 2005, the company also approved to increase the investment limit of FIIs and NRIs up to 49 per cent of paid-up equity share capital, provided that the equity shareholding of a single FII or a sub-account of an FII in the company does not exceed 10 per cent of the paid-up equity share capital of the company.

For FY06, the company posted 37.4 per cent growth in net sales to Rs 560.3 crore, while net profit zoomed 175 per cent to Rs 55.7 crore.

A report by Brics PCG attributes this growth to fact that during FY05 the company operated at a rice processing capacity of 65 tonne in H1 and at 105 tonne in H2. Whereas, in FY06, it operated at full 105 tonne for the whole year.

Also, there was an increase in per kilogram realisation of the processed rice. Uppal expects sales to touch Rs 750-800 crore in FY07 and Rs 1,000 crore in FY08. Profits in FY07 are expected to scale up to Rs 150-160 crore. Looking ahead, the capacity enhancement in rice processing and the power business will primarily drive the numbers.

The stock trades at 15.2x its trailing 12-month earnings. Other rice processors in the country, however, trade at lower multiples "" REI Agro (3.94x), Satnam Overseas (5.29x) and KRBL (5.89x). According to the estimate by Brics PCG, the stock trades at 11.5x FY07E and 6.8x FY08E.